How the loss of trust in the banks is helping Afterpay become enormously successful

Christian Vierig/WireImage
  • A co-founder of buy-now-pay-later platform Afterpay says fintechs are picking up the trust lost to the banks.
  • He says a key part of the startup’s journey is the shifting of power to the millennial consumer.
  • Millennials prefer debit cards and want to spend their own money.

Anthony Eisen, the executive chair and co-founder of buy-now-pay-later platform Afterpay Touch, says the fintech’s success is a demonstration of what happens when people in financial relationships find a way to trust each other.

Another key event in the startup’s journey is the shifting of power to the millennial consumer. By 2030, millennials will earn two out of every three dollars in Australia.

Millennials are weary of falling into a debt trap for lifestyle-related purchases, Eisen told the annual FinTch Australia Intersekt conference in Melbourne.

Having grown up during the GFC, millennials prefer debit cards and want to spend their own money. Two out of three of the 65 million millennials in the US don’t own a single credit card.

Eisen says more than 85% of Afterpay users pay with debit cards rather than credit cards and three quarters (77%) say they use the platform as a budgeting tool.

“As the banks have fallen hard off their pedestal, a new generation of customers is trusting a new generation of financial services and at the top of this is Afterpay,” says Eisen.

“I don’t say this to be arrogant. I say this because I believe there are aspects of our business which help understand what is happening today in finance and what could happen in the future.”

The Australian technology-driven payments company launched in 2015 now estimates it processes more than 10% of all physical online retailing in Australia.

Afterpay was named FinTech Organisation of the Year in July for a second year in a row and its CEO and founder, Nick Molnar, the Emerging FinTech Leader of the Year.

In 2018, Afterpay’s revenue grew 390% Income to $142.3 million.

A key question in starting Afterpay: How do we trust a large group of people you will never meet, to take a product home today and pay it off in fortnightly installments?

Uber and Airbnb faced similar questions. How do you build enough trust to get in another person’s car or to stay in someone else’s house?

“What both these businesses did was eradicate the traditional mistrust — social, cultural and economic — which was associated with accommodation and travel,” says Eisen.

“In doing so they massively freed up available resources which lowered their cost which removed barriers to entry which grew the market and which gave users more options with a wider price range including lower prices, exactly what a healthy market should do.

“They did it the same way every organic system removes mistrust: by connecting participants together in a community of shared values, shared information, simple rules and clear accountability where everyone gets a fair shot, but if you screw up, you’re out.”

At Afterpay, late payment fees are only used to encourage repayment and are not a method to generate profit.

“We were able to build this model because we don’t make our money from consumers — no account fees, no interest and no profits from late fees,” he says.

Afterpay gets paid by merchants to help users plan, buy and pay according to a simple instalment plan.

“When we first developed the idea for the Afterpay model we knew that we could connect customers to retailers, based on shared values, with real accountability and a growing body of information about who lived up to their trust which would allow the community to become increasingly self-selecting, and self-regulating,” he says.

“Our simple business model is the source of our integrity. For Afterpay, adherence to our business model is adherence to our values

“This, above everything else, is how we avoid the mistrust built into the traditional finance sector and build the levels of trust we need to operate effectively.”

He says more than 90% of Afterpay transactions are by returning customers.

And Afterpay rejects about 30% of the purchase requests received.

“If we get it wrong, and a user misses a payment, they cannot use Afterpay again until they settle their account with us,” he says.

“Could you honestly imagine a traditional credit company stopping you from buying anything else or going deeper into debt because you missed a single payment?”

Earlier this month Afterpay’s shares took a hit after a Senate inquiry was formed to investigate consumer lenders not covered by the financial services royal commission.

However, Afterpay says it supports “appropriate regulation” and oversight by corporate regulator ASIC.

The company says its buy-now-pay-later model is different to traditional credit, a fact recognised by the New Zealand Government when it recently decided not to include products such as Afterpay in local credit regulations.

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