A new generation of digital payday lenders emerge in Australia as demand for short-term loans increases

  • A new generation of digital payday lenders are emerging in Australia, with the lending niche growing five times larger in just 12 months.
  • Joining an array of app-based competitors, Commonwealth Bank offers its own payday advance feature to clients.
  • Financial commentators, however, urge people to do their homework before borrowing.
  • Visit the Business Insider Australia homepage for more stories.

While the idea of ​​payday lenders might conjure up images of loan sharks and dimly lit offices, a new generation of financial apps insist they do more than just paint an older model. ladle.

The past 12 months have seen a proliferation of bright new players in the space, in much the same way buy now, pay later traders have moved into the credit business.

With those under 30 among the most financially vulnerable, it’s no surprise that the new wave of lenders are digital entities, awash in bright colors and offering well-marketed applications to a new generation of borrowers.

That is not here the similarities to buy now pay later for products ends. Many new applications promote themselves as helping individuals “manage their cash flow” and allowing individuals to “take control” of their finances.

Just as BNPL products present themselves as a superior alternative to expensive credit cards, these new lenders claim to be more affordable than other forms of short-term credit.

Range

In other words, they say they are innovating new products to disrupt older, more expensive financial products.

MyPayNow is just one example. It charges a 5% fee on weekly salary advances from Australians, with clients accessing up to a quarter of their salary.

Unlike traditional payday lenders, it does not charge an interest rate or ongoing fees, including late fees.

“If someone doesn’t make any payments, we start by making sure their account is put on hold for a while – of course we don’t allow more funds – we educate our clients and work with them personally to bring their account online again, ”Chris Appleyard, chief innovation officer, told Business Insider Australia.

Unlike other forms of credit, customers are also not subject to credit checks.

Appleyard says MyPayNow instead does its own due diligence, looking at three months of transaction data, which he says is more accurate and faster than a credit check.

The company itself falls between the cracks of existing financial regulation, with MyPayNow not required to hold a credit license due to its “exempt product” status.

Just like Afterpay, MyPayNow says there is no danger that it is not entirely under the responsibility of a regulator.

“The mere fact that MyPayNow qualifies for an exemption from this part of the code, in any case [detracts] … complete MyPayNow integration and monitoring processes, ”said Appleyard.

“We are extremely confident that our customer process far exceeds any requirements that a regulator can place on us. “

Others like Beforepay have even gone so far as to adopt the installment model of the BNPL sector.

Commonwealth Bank takes action

However, it’s not just new disruptors kicking in.

Last month, the Commonwealth Bank staged a play, quietly launching its “AdvancePay” feature to some customers.

“We know that customer preferences for the types of credit are changing. Not all customers want traditional forms of credit and from an industry perspective we are seeing innovation in how providers are responding to these changing needs. CommBank AdvancePay is an example of how CBA products can meet these new customer needs, ”a spokesperson told Business Insider Australia.

Based on a similar premise, CBA charges customers up to 2.2% on advances between $ 350 and $ 750. The treatment of late customers is less lenient, with the bank charging almost 15% interest following a late repayment.

The bank says the feature is still a pilot project and is only offered to customers the CBA deems eligible, and comes with a series of “guard rails” to protect customers.

“These safeguards include depositing a regular salary into an ABC account, access to only one facility at a time, frequency limits in terms of the number of times the product can be used in a given facility. year and a cap on how much their next payout can be accessed to make sure customers still have money on payday, ”the spokesperson said.

The CBA plans to roll out the trial permanently in the coming months, with the bank saying its research indicates it could appeal to one in three Australians.

Explosion of debt sectors

Everyone is vying for a piece of the growing pie. According to the latest data from Canstar, only 2% of Australians had payday lender debt in 2019. Last year that figure jumped to 10%. It comes at the same time as buy now, pay later debts are skyrocketing and credit cards are declining.

However, payday lenders are not the only type of service experiencing a worrying growth spurt. A separate report released last month by the Consumer Action Law Center, as many as 1.9 million Australians in 2020 used a debt vulture – which includes debt management and credit repair companies.

The frankly astonishing figure seems to have a few main drivers.

On the one hand, Australia’s first recession in three decades pushed many people into uncharted financial territory, with one in six Australians saying they’re more likely to ask for help.

On the other hand, payday lenders and debt services seem to have doubled their marketing budgets. A recent survey found that more than one in two Australians had seen advertisements for them.

Understand the product

But while new players and old incumbents can claim to innovate, there are still some who simply apply lipstick to a pig, according to Canstar chief financial officer Steve Mickenbecker.

“These new offerings that we’ve seen tend to emphasize their simplicity, in a way that suggests they’re inexpensive. but while they make it look simple, they can often be quite expensive, and even more expensive if you find you can’t pay them back on time, ”Mickenbecker told Business Insider Australia.

He calls for caution for people who turn to products as a last resort.

“These types of offers appear when people are desperate and that in itself should be a warning that these are expensive ways to get credit,” he said.

“People really have to do their homework with these products and figure out if they will be able to make their payments and if not, how much is it really going to cost.”

Little has been done to curb the bad actors in the debt sector

A cautious approach may be justified given the reputation of the industry.

Capable of lending up to $ 2,000 at often exorbitant interest rates, some opportunistic entities may end up taking more out of people’s pockets than they start out with.

Current legislation allows these lenders to charge up to 20% of the original principal, while interest rates can exceed 400% when annualized.

In 2019, then shadow treasurer Chris Bowen criticized the lack of regulation, saying in some cases Australians could end up paying back more than eight times what they borrowed.

Rather than being subject to more stringent regulation, much of the debt industry has escaped increased scrutiny. Instead, the ASIC regulator steps in when it finds a breach, for example by taking action against payday lender Cigno last year.

“Although loans are usually only for small amounts, they impose exorbitant fees that leave some people supposed to owe amounts many times the value of the original loan, in a matter of months,” said Gerard Brody, CEO of Consumer Action. .

If you are in debt, contact the National Debt Helpline.

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About Scott Bertsch

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