Afterpay says no to credit checks

Afterpay says undertaking credit checks on users would be useless, as its young customer base often doesn’t have a credit history to check.

Afterpay founder and US CEO Nick Molnar. Picture: David Geraghty.

Afterpay says undertaking credit checks on users of its buy now, pay later (BNPL) platform would be useless, as its young customer base often doesn’t have a credit history to check.

In an additional submission to a federal Senate committee looking into further regulation of Australia’s fintech sector, the BNPL provider said robust financial checks were unhelpful on a product that wasn’t an interest-accruing credit service.

Afterpay said credit checks were not fit for purpose within its operating model, as its younger cohort of customers would not qualify due to a lack of lending history.

The company also said the onset of the coronavirus pandemic also made credit checks less meaningful, with lenders suspending credit reporting to regulators.

“Credit checks are a lagging customer indicator, are unhelpful for younger adults with no credit bureau history, and often provide an incomplete picture of a customer,” the company said.

Afterpay has also rejected claims the industry should be subjected to the country’s credit laws, as the current framework does not support instalment payment lending.

It said the regulation is designed to allow a provider to make a one off decision to lend a customer a large sum of funds, at a set interest rate.

BNPL providers have experienced a strong uptake in activity since the beginning of the COVID-19 shutdown.

Last week Afterpay said that during the first 10 weeks of the pandemic, it had added a million US customers, bringing its total US active shopper base to 5-million.

During the economic downturn caused by the pandemic, Afterpay adjusted its risk settings which resulted in lower transaction approval parameters.

The company said in its submission to the senate inquiry, being led by Liberal senator Andrew Bragg, that BNPL was being used as a budgeting tool during the downturn.

Afterpay indicated it is in a strong position to capitalise on the growing trend of online and digital spending.

It noted deferral of credit card repayments, which have been a popular assistance measure throughout the pandemic, would still inevitably burden customers with more debt.

“Credit card issuers are only profitable when consumers pay high rates of interest,” Afterpay said.

“While it is possible to take the immediate sting out of products such as credit cards during a crisis, this only benefits consumers in the short term.”

Its submission outlines that 85 per cent of its customers paid using debit cards, with the remaining 15 per cent paying via credit card.

BNPL providers have previously come under scrutiny for pushing younger people into high levels of debt, and in some cases allowing minors to access a lending service.

The Australian Finance Industry Association is seeking to implement a code of practice, which would prohibit people under the age of 18 from using a BNPL service.

Afterpay said the Australian Securities and Investments Commission’s new product intervention powers have stopped the ability of a regulatory-compliant product from resulting in substantial consumer detriment.

They are also favourable to the roll out of new open banking laws to the fintech sector.

The Australian Competition and Consumer Commission on Tuesday said it would start taking applications from fintech businesses wanting to become accredited consumer data right recipients.

Afterpay shares closed up 1.86 per cent on Thursday at $46.09 a share.