Afterpay “very much on the tech side” of fintech
Managing director Nick Molnar on Afterpay's tech opportunity.
Interest-free payments platforms are having their moment. Up until a year or two ago, people associated interest-free finance with furniture stores or promotional offers, but companies like Afterpay are quickly changing this perception. "Millennials really love our product because they use it as a budgeting tool for buying nice little luxuries or nice little necessities. That's all about retail. It's not about finance," Afterpay managing director Nick Molnar said. These millennials, which make up approximately three quarters (73%) of its customer base, use Afterpay to buy everything from fashion to homewares. The system works by customers selecting Afterpay as their payment option in-store or online, after which they're approved for a fortnightly instalment payment plan. No interest is charged, with the company instead making money primarily from merchant fees.
While the approval seems instantaneous, Afterpay uses its own data to approve customers on a sale-by-sale basis. "We look at hundreds of different attributes to look at someone's risk profile," said Molnar. "Our risk assessment engine then scores the customer in real time, which then approves or declines that customer. We assess each order every time someone buys." Afterpay's privacy terms state that the company "may also obtain information about you from third parties, such as credit reporting bodies", but Molnar says that only internal data is used to assess a customer. "Afterpay's system is a completely closed loop. We only look at our own data to make the assessment in real time without going out to any external agencies." "I mean, we promote responsible behaviour, and I guess that's kind of the core of how we built our products."
Despite it being a tech-centric platform, Molnar believes its biggest opportunity lies in-store. "When you acquire a retailer online, what happens is you inherit a really fantastic in-store network. Because a lot of our online retailers are some of the best retail brands in the country, they have a big in-store network. What we're working on with those brands at the moment is how we roll out Afterpay to that environment." Afterpay's store network is far-reaching and seemingly growing daily, with over 2,600 stores currently offering Afterpay as a payment option. However, Molnar says it does have criteria for its retail partners. "We've got criteria in terms of categories that we don't operate in, so whether that's adult or gaming, etc. But other than restricted categories, we love to work with some of the smaller retailers in Australia as well." "I mean, our shop directory becomes such a cornerstone of customers. They come to us to decide where they want to shop. That's pretty incredible for us."
Tech or finance?
Afterpay, and similar platforms such as Openpay and zipMoney, are offering what they often describe as a new type of Layby. The positive difference is that customers can receive products immediately and manage their payments online, but the negative difference lies in possible costs. Admittedly, Afterpay only charges fees if an automatic payment fails and the customer fails to make a payment that day – $10 if the payment hasn't come through by 11pm the day it's due and another $7 fee if no payment has been made a week later. While minimal, the costs are still a risk that customers need to acknowledge before applying. Again, according to its privacy terms, Afterpay reserves the right to report negative activity to a credit reporting body. However, there have been no anecdotal claims of this happening to customers discussing Afterpay in online forums. Molnar also says that if a customer's account isn't in good order, meaning they have late payments owing, they will not be approved for additional purchases.
It's unlikely Afterpay's system will develop more of a traditional credit assessment focus, especially as their customer base grows exponentially. Afterpay had almost 100,000 customers in August 2016, but today this number extends beyond 450,000. As its customers grow and therefore so does its available data, there will be less of a reason to turn to external sources to help Afterpay approve customers.