We offer a different service that and "After-pay" business model and it is important to understand the difference. With our model the merchants do not have to discount the goods or service.
"After-pay" arrangement that allow consumers make purchases are using a business model called “factoring” of accounts receivables. A company sells its accounts receivables (money owed for a good or service that has already been delivered) to a lender, typically at a discount.
An example of traditional factoring would be a company selling A$100 in accounts receivables to a lender for A$95. The company gets A$95 cash up front (to spend on wages or ingredients) and eliminates the risk of not being paid. The lender makes a A$5 profit once the A$100 has been collected.
Similarly, if you make a A$100 purchase using Afterpay, the merchant immediately receives A$96. "After-pay" then collects four instalments of A$25 from the customer, making a A$4 profit.
The A$4 difference is essentially the interest that "After-pay" charges (equivalent to 4.17%).
The unusual nature of the transaction is that Afterpay lends to the business and the customer repays Afterpay.
The 4.17% "After-pay" charges in this example is quite a modest interest rate, at least compared to credit cards. However, since each loan is outstanding for only a short time, generally six to eight weeks, or a maximum of two months, "After-pay" can earn much more than 4.17%.
This is because of compounding interest. Suppose a A$1,000 loan is made on January 1 at an interest rate of 4%, for two months. On March 1, A$1,040 is collected – the original A$1,000 plus A$40 interest. Another loan is made on March 1 – A$1,040 at a 4% rate, for two months. On May 1, A$1,081.60 is collected – the original A$1,040 plus A$41.60 interest. This can be repeated again and again. By December 31 the initial A$1,000 has grown to A$1,265.32. This equates to a 26.5% annual interest rate.Except Afterpay doesn’t have to wait two months to collect the entire amount as a lump sum. Instead, it collects the money lent in instalments, which means the the annual interest rate is approximately 30%!
There are three reasons a merchant may enable "After-pay" on their site. The merchant could make a sale it would otherwise not make, hence revenue increases. It’s collecting cash upfront, which improves its balance sheet. And the merchant eliminates the risk it won’t be paid if a customer defaults.
However, the merchant has to discount the goods or service being sold!
There are two types of factoring of accounts receivable – with and without recourse. In factoring with recourse, the lender will return uncollected debts to the business.
In factoring without recourse, the lender is responsible for the collection of unpaid invoices from the customer and cannot return them. In other words, when factoring with recourse the business retains the risk of non-payment.
There is a risk to "After-pay" if the customer defaults and does not pay the amount due. "After-pay" business model is akin to factoring without recourse.
To discourage this behaviour, Afterpay charges fines if the customer fails to make payments (a A$10 late fee, and a further A$7 after seven days). If the customer still does not pay, Afterpay writes off both the initial loan and the fines charged. The fines are still counted as revenue in Afterpay’s accounts.
In 2016-17, "After-pay" generated about A$23 million in fees from retailers and another A$6.1 million in late fees. It wrote off only A$3.3 million in bad debt.
For the customer there is a risk, as the "credit checks" are zero there is a risk of being faced with later fees and not being able to make repayments that will lead to bad debt and poor credit ratings.
Aftercare is not for everyone.