Among other things, 2020 has been the year of e-commerce, and, by extension, it’s become the year of buy-now-pay-later too.

Aussie market leader Afterpay has seen its share price top $100, up from $8.90 in mid-March. Competitor Zip Pay has also been going gangbusters on the ASX, and newer players like Payright and Limepay are reaping the benefits of a mass shift online.

Such products essentially extend short-term credit to consumers, allowing them to take on a small debt and spread their payments into more manageable chunks.

We’re also seeing other alternative credit solutions appearing. Last week, fintech BeforePay raised $4 million for its product allowing users to borrow up to $200 from their pay cheque in advance. BeforePay charges a flat 5% fee, for short-term loans, often over just seven or 14 days.

SmartCompany’s reporting on Beforepay generated lively discussion in the Sydney Startups Facebook group, with some commenters questioning the ethics of such a product and suggesting the BNPL trend has gone too far.

Some called it a debt trap for the vulnerable — essentially a payday loan — while others pointed to the demand in the market; Beforepay launched in early-2020, and now has more than 100,000 users.

Fintechs like this are providing credit in a way traditional institutions can’t. But are they improving the lives of consumers, or simply taking advantage of a broken banking system for their own gain?

Last week, the Australian Securities and Investments Commission (ASIC) released a report into the industry, finding 21% of users had missed payments within the past 12 months.

More concerning, 20% said they had cut back, or gone without, essentials — even skipping meals or paying bills late — in order to make their BNPL payments on time.

“When normalised, these services are some of the most expensive credit products in the market,” Luke Campbell, co-founder of financial wellbeing app Pineapple tells SmartCompany.

The big problem with ‘traditional’ payday loan products is the debt spiral they can lead to, he explains, as users “take credit and need more credit to pay that credit back”.

Products like Beforepay are “marginally better”, Campbell says, but the main issue is the price, which he sees as excessive.

Beforepay co-founder and chief Tarek Ayoub stresses the startup doesn’t have any ‘hidden’ fees, and says the amount anyone can borrow is capped at $200, which must be repaid before another loan can be taken. New users are limited to loans of $50 or $100, based on their income and spending history.

“The idea is for this to be a convenient way to access pay without being shackled to an arbitrary employer-determined pay cycle,” Ayoub says.

Credit? Check.

Campbell says some alternative credit products operate more responsibly than others, and compared to credit cards, “some providers are a much more economically smart product”.

But one thing that tends to come up in the social media comments section is the different approaches to credit checks.

There is concern the people using such services — particularly young people, who are more likely to miss repayments — might be compromising their credit history for the future.

Zip Pay’s website, for example, says it ‘may’ run a credit check on anyone who applies for an account to confirm they are able to make repayments.

If it does, that will show up on the consumers’ credit history in the future, Campbell explains, simply showing they’ve made an inquiry.

“One check on Zip isn’t going to destroy your credit file,” he says, but 10 or 15 checks might.

Afterpay’s terms and conditions also note it reserves the right to order a credit report on a user, however, it’s not a prerequisite for opening an account and it doesn’t appear to be standard procedure.

Beforepay says it has its own assessment criteria, which is based on users’ historic spending behaviour and takes into account income and expenses. Ayoub claims using the service won’t affect a user’s credit score.

However, while paying off a credit card every month can improve the user’s credit score, making BNPL repayments won’t.

“That could also make it harder for people down the line to get access to credit,” Campbell says.

To regulate or not to regulate?

Any financial product comes with risks, but as BNPL and pay-on-demand products are so easy to access, users don’t necessarily consider them…

This article is from SmartCompany, you can read the full article here:

https://www.smartcompany.com.au/industries/retail/bnpl-beforepay-afterpay-ethics/