Last month I did a writeup on the new generation of functionally identical buy now, pay later companies taking advantage of the low-interest rate environment to offer dirt cheap short-term loans to mostly younger consumers on a variety of products and services. I mused idly — as have many analysts, less idly — on what these companies are actually going to do when the party is over. It’s difficult to imagine a reality where the dozens upon dozens of sleazy payday lenders1 masquerading as innovative fintech platforms all manage to survive the next few years.
Afterpay, one of the big dogs of the BNPL world and the model for legions of varyingly unscrupulous imitators, has given us a clue for where the upper echelons of the sector might go with its latest product announcement, Money by Afterpay:
'Money by Afterpay' will be a standalone finance app, separate from its current shopping experience, with customers to be issued a "basic" deposit account and debit card.
A 1% interest rate will be paid on savings, comparable to market-leading rates, and Afterpay says the accounts won't charge any fees.
Unlike the much-vaunted ‘neobanks’, which sought to take on Australia’s big four banking oligopoly with neon-coloured debit cards and slickly-designed apps and generally failed at doing so — see Xinja, for example2 — Afterpay isn’t actually attempting to operate its own banking infrastructure, which would require substantial investment. Instead, Westpac will handle everything from the banking licence to interest payments to risk and compliance, while Afterpay will be responsible for the app itself and the user experience. This puts a much lighter regulatory burden on Afterpay, which only requires a financial services licence so that it can offer general financial advice through the app.
In crude terms, Westpac provides the banking, and Afterpay does the marketing.
This accords with how Afterpay likes to imagine itself: as a customer acquisition and marketing platform. As I mentioned in my last post, Afterpay likes to pretend it doesn’t offer something as uncouth as credit. It argues its real customer is retailers, who pay fees in order to gain access to Afterpay users. This doesn’t necessarily cohere with how users actually use the platform, and it certainly doesn’t explain why the actual core functionality of the product shouldn’t be considered credit, which it absolutely is. But that’s the narrative.
Money by Afterpay operates on the same model, but for banking. Afterpay’s user base, which is disproportionately younger women, consists of exactly the kind of customer banks want to capture. Afterpay is positioning itself as an acquisition channel for businesses seeking young customers, bringing them into the ecosystem with the zero-interest loans and then funnelling them elsewhere — in this case, into legacy banking. (It’s kind of like Dollarmites for 22-year-olds who shop at The Iconic.) Afterpay says it will make "a small income from deposits", suggesting Westpac will pay a fee for users just as retailers do. But the main game, ultimately, is referrals. Afterpay intends to eventually make its return on Money by referring users to meatier financial products like mortgages and superannuation — which, again, it won’t be offering itself — and taking its cut. (And, as one tweet pointed out to me quite rightly, Afterpay will be happy to dodge the Visa and MasterCard fees on BNPL purchases made directly from a Money account.)
In much the same way as Afterpay’s core product targets a younger consumer who is wary of traditional credit cards, Money by Afterpay provides banking to a customer who is wary of big banks. But, at the end of the day, it is a traditional bank underwriting the whole enterprise, just with a fintech paint job. You might be reminded of my newsletter earlier this month about the increasing dominance of the middlemen, ticket-clippers and dropshippers in online commerce.
Afterpay’s job in this case is to launder the image of banks and financial institutions for a hip new set. Underneath it all, it’s the same old shit.
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