Beforepay goes for the broke with late-season IPO

Jonathan Shapiro and Michael Roddan. Nov 22, 2021 - 5.00am

Beforepay's model is relatively simple. Its Cash Out product lends money against a customer's next pay, charging a rate of 5 per cent. Just how profitable this activity is, is debatable, but it's clearly popular.

Beforepay has increased its users at an impressive 25 per cent compounded per month to 125,000. This growing cohort almost always repeat their use, and the amount they borrow has also increased. That has resulted in a doubling of its monthly advances in just six months to $22.7 million. The average loan duration is about 15 days

 

But the challenge for Beforepay, which is operating in arguably the riskiest area of consumer finance, is getting its money back. So far, it has not been able to do that as its write-offs have exceeded the interest it charges to customers.

But as Beforepay prepares to list, it says it has managed to bring its high level of bad debts under control. Losses have declined from a whopping 9.5 per cent to about 3 per cent.

The reason for the improvement, Beforepay explained, was a change in its lending policies. By no longer extending funds to customers reliant on government benefits such as Centrelink, their lending book is performing much better.

That has resulted in an improvement in its net transaction margins (lending revenue, less funding costs, write-offs and platform expenses) from negative 6.5 per cent to negative 0.6 per cent over recent quarters.

 

While payday lending, or the preferred term "Pay On Demand", is notoriously risky, Beforepay says the market opportunity is large. More than 5 million Australians, or 56 per cent of the working population, have no savings and face financial difficulties.

It says these financially vulnerable Australians have been abandoned by the banks, which are reluctant to provide overdrafts, and desire the product's convenience and ease of use. Like Afterpay, it has pitched itself as a virtuous, more accessible alternative to high-interest-rate credit cards.

 

But Beforepay is succeeding in luring users to its unregulated payday lending product, even if others have doubts about the ethics of its model.

Beforepay can claim some moral high ground in that it is lending money at more favourable implied rates than some of its competitors.

But it also might be a sign that Beforepay is underpricing risk. In which case, the sceptics say it is simply engaging in a transfer of capital from speculative investors fixated on top-line revenue growth to destitute Australians in financial difficulty.

 

 

Required - With reference to the article "Beforepay goes for the broke with late-season IPO'", answer the following:

a) Explain whether Beforepay is a partner, pet, parasite, or predator. 

b) What middleman function(s), if any, does Beforepay perform? Explain your answer 

Answer rating: 100% (QA)

a Based on the information provided in the article it can be argued that Beforepay is a predator Bef... View the full answer