The Adelaide Advertiser (News Corp) and Channel 9 are running...

The Adelaide Advertiser (News Corp) and Channel 9 are running negative pieces on this stock. They quote Fox Symes (who themselves are equally grubby) as saying that, "an alarming number of customers were presenting with [Afterpay] debts they cannot pay." and that 5% of all Fox Symes customers in April and May had an AFY debt.

The media are blaming a "spontaneous" account application process and lack of credit checks as being the main driver of the problems.

Shareholders should be asking why AFY isn't paying a couple of dollars per new account to do a Veda (Experian) or D&B credit check before approving a customer. By definition, not doing a credit check means AFY is lending to sub-prime and uncreditworthy customers.

This usually ends badly for all concerned, especially if the company (rather than the debt funder) has to take first loss.

Additionally, I suspect the company is understating its true loss rates. The issue here is that portfolio loss rates are calculated as write-offs divided by turnover. BUT... losses take time to flow through a credit portfolio, usually 6 months. So, the write-offs today are from customers that used their AFY account 6 months ago, when turnover was significantly lower. The explosive growth of the AFY lending book is potentially masking a huge delinquency and write-off problem.

If (or rather when) the company realises it has a problem, it will start turning the screws on customers who are in arrears - adding late payment fees and escalating collection activities - hence the increase in customers running to Fox Symes for help. This is usually a futile exercise - if a customer can't pay, they can't pay no matter how many fees you load on to them.