24.01.19 | AfterPay and ZipPay - credit providers?

By Jessica Sier 4 January 2019 4 min read

So if you’re an investor in the Spaceship Universe Portfolio, two of its Australian technology companies - AfterPay and ZipPay - attended a Senate Inquiry this week.

A Senate Inquiry is when a Senate-established committee investigates the facts about a specific policy or issue to report back to the Senate.

Anyone who has knowledge or experience relevant to these topics is invited to make a submission to the Inquiry. (You can if you want to!)

Senate inquiries are pretty commonplace in Australia. We had one recently into #notmydebt (where thousands of Centrelink recipients suddenly found they owed the government money after it installed a new automated debt collection process).

Another one is currently underway, looking into Fair Dinkum Power. This committee is looking into the electricity industry and power providers.

(If you’ve got thoughts, you can submit them before 15 February 2019!)

This Senate Inquiry, instigated by the Labor Party, is investigating the effect of payday lenders, debt management firms and buy now, pay later businesses, on citizens.

They are worried these companies could be encouraging people to spend money they might not have, on things they don’t need, and stinging them with very high fees when they don’t pay the money back on schedule.

I mean, that’s how credit cards work and what the major banks do every day.

But the thing is, the banks do credit card checks on individual people and companies to make sure they're ‘good’ for the money. These checks are designed to make sure the credit card won’t cause people undue stress or financial pressure.

And one of the things the Senate Inquiry is exploring is whether or not businesses like AfterPay should have to do credit checks like the banks.  

The question is, are they actually credit providers?

AfterPay

Spaceship’s investment team likes AfterPay because it isn’t a credit provider, and we think that’s why shoppers like it too.

Let’s look at the economics of the business:

AfterPay doesn’t make its money from charging interest on the outstanding balance if customers don’t pay on time.

Rather, it makes the bulk of its profits from the stores. Every time a customer uses AfterPay’s buy now, pay later service at a shop, the merchant pays AfterPay. In the last financial year, the average merchant margin was around 4.0%.

That is steady money, not conditional on whether or not the person pays back the store in time. That merchant clip is always going to come in.

If people don’t pay back their instalments, AfterPay covers the difference.

AfterPay also charges customers a late fee, but it’s capped. For example, if you buy something over $40, it’s capped at 25%. Anything over $272, the late fees are capped at $68.

If you buy something for less than $40, you pay a one-off $10 late fee.

No matter how much you spend, if you don’t pay it back on schedule, AfterPay will charge a flat $7 late fee after seven days.

So if I bought a $100 frock, and said I’d pay it back in four $25 instalments. And then didn’t. I owe AfterPay another $25 in late fees on top of the purchase.

If I bought a $1,000 frock, and said I’d pay it back in four $250 instalments. And then didn’t. I owe AfterPay another $68 (because of the cap) on top of the original purchase. And if I didn’t pay at all, then I just can’t use AfterPay anymore.

That’s what makes AfterPay not a credit provider. Traditional credit providers begin charging interest when people are late with their scheduled payments. Credit providers make their money that way.

AfterPay has the potential to lose money when people are late or don’t pay back at all, because it covers the difference. It takes on the risk that people won’t pay back. That’s why the system is designed to encourage people to pay on time.

According to AfterPay, the average AfterPay purchase sits around $140 to $150 with over 90% of accounts holding an outstanding account balance of less than $500.

Compare that to the average credit card debt in Australia, which according to Finder.com.au is around $3,260 with an average balance of $1,973 (which is accruing interest charges).

Zip.Co

ZipCo is a bit different to AfterPay. ZipCo is a credit provider, but it has two products.

ZipPay is the first, which is similar to AfterPay. It’s for purchases under $1000, and doesn’t charge any interest.

ZipMoney is for bigger purchases over $1,000 and, after an interest free period, it begins charging interest plus a $15 late fee if the customer is late with their payments. This, plus an establishment and an account fee, is how it makes its money.

The Senate Inquiry will still hear a bit more about the businesses and how they operate, but to Spaceship’s investment team, the risk to AfterPay is that it would be labeled as a credit provider.

This would require it to be appropriately licensed and subject to credit legislation, including conducting lending due diligence checks.

That could end up being expensive and impact the customer experience, especially considering people largely use AfterPay for smaller purchases.

If you’ve got any thoughts on this, let us know!

P.S. The header is the painting "Young Corn" by American artist Graham Wood in 1930. Mr Wood also painted the famous American Gothic image of a dour farming couple holding a pitchfork.

Words by
Jessica Sier Right Chevron

Jessica Sier is a financial journalist who currently heads up Spaceship's content. Prior to that she was a reporter at the AFR where she discovered breaking down financial bulls**t was a public good.

24.01.19 | AfterPay and ZipPay - credit providers?