The new BNPL? Early wage access Fintechs changing the face of credit. An analysis.
The Thinner Loop n. I
The Thinner Loop contains original analysis on the Australian Fintech landscape. It looks to cover just one topic in detail, unlike my weekly digest, which covers many.
đđ˝ New Fintech, who dis?
So, thereâs a new kid on the block. Theyâre called early wage access fintechs, and thereâs been a bunch of them popping up in Australia over the last year. Early wage access provides a brilliant alternative to traditional forms of credit, especially those who are looking to improve their financial wellness, pay cycle management and budgeting.
â What is early wage access?
Early wage access, also know as pay on demand, allows you to access a portion of your wage before you get paid. So, if I need $200, I can log in to an app, it analyses my transaction data to find a wage, and the $200 gets transferred to my account (sometimes instantly). Think of it a bit like securitising against your future earnings. Yeah, there are a few caveats - but thereâs often no credit check, and the fees are seriously low.
đĄ What problem do they solve?
If you, or your employees, need to get access to funds for whatever reason - car repairs, a missed bill, or a birthday present you forgot about - then early wage access solves your problem. A key differentiator for these apps is that they categorise your transactions (wrapped in a great UX, and emojis, duh) to assist with budgeting and spending. It will also use some swanky algorithms to tell you what youâve been spending on, and when, so you can get better control of your finances. For some, this completely removes the need for a credit card - as we know, credit card usage is declining in Australia and everyone from the avid spender to the careful budgeter doesnât want to get into debt for years. With this tool, youâll be indebted for a month maximum, and the funds are direct debited out next pay day. So theyâre part personal finance management (PFM), part lending tool. A number of the apps will also only lend to you if youâre a good position for the month (e.g. havenât had a change in employment circumstances). Beforepay is also rocketing up the app store:
đ How do they work?
A number of early wage access are direct to consumer, others go via an employerâs pay roll and are offered as a value-added service. In the more common case of direct-to-consumer, the user signs up, adds their bank details (via a financial data aggregator), the data is analysed (e.g. Jane gets paid $2000 per month) and then a loan limit is presented to the user (Jane, we can offer you $200), depending on their ability to repay.
In the payroll case, a business integrates into an HR or payroll system, and it offers early access to the wage as a value-add for their employers.
If the provider supports NPP, the funds will appear in ~60 seconds.
In both cases, the funds are direct debited from your account next pay day (at a rate of usually ~5% - I get onto pricing later).
Have any thoughts? Feel free to use the comment section to share your 2c
đ¸ How much do they cost?
It varies depending on the provider and loan amount. The max amount offered by MyPayNow is $750 with a minimum of $200. Beforepay offers a $300 max amount, while FuPay offers $200. You can find more about the pricing here.
đ° How do they make money?
These companies make money by charging a one-off, fixed fee for the service amount. The direct to consumer solutions usually charge a fixed fee of 5%. So, in an instalment of $750 on MyPayNow will cost you $787.50 (so, 5%). If you were to do this each month for 12 months (and assuming employment circumstances didnât change), $9000 would cost you $9450 (which is similar to an annual credit card fee). Both Beforepay and FuPay have the same repayment for $200 @5% being $210.
đ Ok, so who are the players?
Thereâs been an influx of early wage access companies, including FuPay, Beforepay and MyPayNow (which, if youâre a Sydney-sider, youâve probably seen on a bus or billboard recently). The common business-integrated solutions are known as Earnd and Employment Hero (Instapay).
See below:
Beforepay (formerly Cheq)
CommBank AdvancePay (closed beta)
Nine25 (waitlist)
đ Why Beforepay instead of Afterpay?
Generally speaking, BNPL transactions are tied to an item (e.g. buying a t-shirt online). There are some BNPL providers (adjacent competitors to early wage access) that offer virtual cards, which can be used at a point of sale - namely Zipâs virtual card (which is linked to Zip Pay, which is more a revolving line of credit) and Bundllâs virtual Mastercard (part of Humm and Flexigroup). Early wage access provides funding that can be withdrawn for cash or transferred as needed - it isnât tied to a specific card scheme and you are free to use it how you wish - so it definitely appeals to a new market segment.
Note: above was edited on 24/2 to replace Zip Money with Zip Pay.
âď¸ How do they scale?
An interesting product development is FuPay, which offers a FuPay virtual card which acts a credit card that is designed to be paid off each month. You can shop within your limits knowing that it will come out next monthâs pay check. At the moment, the industry is in its early days - but I can imagine thereâs multiple use cases for how they evolve and adapt, much like the BNPL industry did.
đ¨ What if I donât pay?
Most providers will offer a short window to repay the debt, or retry to direct debit. If it is unsuccessful, then the account becomes frozen and you may incur some additional charges - but this completely depends on the provider.
âď¸ Isnât this payday lending?
No. Although payday lending does rely on a wage cycle or some form of proof of income (not always though) - this comes with extortionate fees, confusing terms and sometimes negative impacts to your credit score. For example, payday lenders typically charge high interest rates on the repayment and additional fixed fees for things like loan establishment, failed direct debit fees, default fees, enforcement expenses and servicing fees (which often amount to a substantial increase on the original loan amount). One example: a payday lender lending at 56% will result in a $456 repayment, v.s. Beforepayâs $315.
đ¨đ˝ââď¸ Considerations (namely Regulatory)
Proactive repayments will not influence credit score, however credit scoring algorithms may (or may not) deem these as risky when looking at ability to repay.
ASIC requires Payday lenders to ask if you have more than 2 existing payday loans to understand your ability to repay. This does not apply for early wage access, so consumers may find it easy to overextend if more players enter the market. This can be attributed to the risk of BNPL âdaisy chainingâ that I discussed in December last year.
Like some BNPL providers, itâs not clear whether this fits the definition of âcreditâ (i.e. charging interest) - I assume it does.
âď¸ Summary
Thatâs it for the first Thinner Loop. I hope it provided insight into the latest trend in Australian Fintech. If you want to share the love to your network, feel free to smash that share button below.
Peace and pout,