- A new breed of digital payday lenders are popping up in Australia, with the lending niche growing five times larger in just 12 months.
- Joining an array of app-based competitors, the Commonwealth Bank is offering its own pay advance feature to customers.
- Financial commentators, however, are urging people to do their homework before borrowing.
- Visit Business Insider Australia’s homepage for more stories.
While the idea of payday lenders might conjure up images up loan sharks and dimly lit offices, a new generation of financial apps insist they’re doing more than apply a new lick of paint to a sleazy old model.
The last 12 months has seen a proliferation of shiny new players in the space, much in the same way buy now, pay later operators moved into the credit sector.
With those under 30 years of age among the most financially-strained, it’s unsurprising that the new wave of lenders are digital entities, awash with bright colours and offering well-marketed apps to a new generation of borrower.
That’s not where the similarities to buy now pay later products ends. Many of the new apps market themselves as helping individuals “manage their cash flow” and empowering individuals to “take control” of their finances.
Just as BNPL products promote themselves as a superior alternative to expensive credit cards, these new lenders claim to be more affordable than other forms of short term credit.
In other words, they say they’re innovating new products to disrupt old, more expensive financial products.
MyPayNow is just one example. It charges a 5% fee on advances of Australians’ weekly pay, with customers able to access up to a quarter of their wage.
Unlike traditional payday lenders, it doesn’t charge ongoing interest rates or fees, including late fees.
“Should someone not make a payment at all, we start with ensuring their account is put on hold for a moment — we don’t allow more funds to be drawn of course – we notify our customers and work with them personally to bring their account back online,” chief innovation officer Chris Appleyard told Business Insider Australia.
Unlike other forms of credit, customers aren’t subjected to credit checks either.
Appleyard says that MyPayNow instead does its own due diligence, scrutinising three months of transaction data, which he claims is more accurate and timely than a credit check would be.
The company itself meanwhile falls between the cracks of existing financial regulation, with MyPayNow not required to hold a credit licence due to its status as an ‘exempt product’.
Much like Afterpay, MyPayNow says there’s no danger in it not being entirely under the remit of a regulator.
“The simple fact that MyPayNow qualifies for an exemption from this part of the code, in no way [detracts] from the … comprehensive onboarding and monitoring processes of MyPayNow,” Appleyard said.
“We are extremely confident that our client process by far and away exceeds any requirements a regulator may set out for us.”
Others like Beforepay have even gone as far as adopting the instalment model of the BNPL sector.
Commonwealth Bank getting in on the action
However, it’s not just new disruptors getting in on the action.
The Commonwealth Bank last month made a play, quietly launching its ‘AdvancePay’ feature to certain customers.
“We know that customer preferences around types of credit are changing. Not all customers want traditional forms of credit and from an industry perspective we’re seeing innovation in how providers are meeting these changing needs. CommBank AdvancePay is one example of how CBA’s products can meet these emerging customer needs,” a spokesperson told Business Insider Australia.
Based on a similar premise, CBA charges customers up to 2.2% on advances of between $350 and $750. Less forgiving is its treatment of late customers, with the bank charging almost 15% interest following a late repayment.
The bank says that the feature is currently still part of a pilot and only offered to customers CBA deems eligible, and comes with a series of ‘guardrails’ to protect customers.
“These guardrails include having regular salary deposited into a CBA account, having access to only a single facility at a time, frequency limits in terms of the number of times the product can be used in a year and a cap on how much of their next pay can be accessed to ensure that customers still have money left on pay day,” the spokesperson said.
CBA is looking to roll out the trial as a permanent feature in the coming months, with the bank saying its research indicates it might appeal to as many as one in three Australians.
Exploding debt sectors
All are competing for a slice of a growing pie. According to the latest Canstar data, just 2% of Australians held payday lender debt in 2019. Last year that soared to 10%. It comes at the same time as buy now, pay later debts soar and credit cards decline.
However, payday lenders are not the only type of service going through a worrying growth spurt. A seperate report published just last month from the Consumer Action Law Centre, up to 1.9 million Australians in 2020 used a debt vulture – which includes the likes of debt management and credit repair firms.
The frankly astounding figure would appear to have a few main drivers.
For one, Australia’s first recession in three decades has pushed many into unchartered financial territory, with one in six Australians saying they’re more likely as a result to seek help.
For another, payday lenders and debt services look to have doubled down on their marketing budget. A recent survey found that more than one in two Australian respondents have seen ads for them.
Understand the product
But while new players and old incumbents alike might claim to be innovating, there are still some who are merely applying lipstick to a pig, according to Canstar financial services executive Steve Mickenbecker.
“These newer offerings we’ve seen tend to stress their simplicity, in a manner which would suggest they’re low-cost. but while they make it seem like they’re simple, they can often be quite costly, and even costlier if you find you can’t repay them on time,” Mickenbecker told Business Insider Australia.
Beware of payday lenders wanting to direct debit loan repayments from your bank account. If you live in Victoria, call us on our Koori Helpline on 1800 574 457 for free advice. Also contact our friends at @thevalsmob VALS on 1800 064 865. pic.twitter.com/OKGyQkxNMZ
— Consumer Action (@consumer_action) January 19, 2021
He urges caution for people who turn to the products as a last resort.
“These sorts of offerings emerge when people are desperate and that in itself should be a warning that these are expensive ways to get credit,” he said.
“People have to really do their homework with these products and figure out whether they are going to be able to make their payments and if not, how much is it really going to cost.”
Little has been done to curb the debt sector’s bad actors
A cautious approach may be warranted given the sector’s reputation.
Able to lend up to $2,000 at often sky-high interest rates, some opportunistic entities can end up taking more out of people’s pockets than they put their in the first place.
Current legislation allows such lenders to charge up to 20% of the principal up-front, while interest rates can run in excess of 400% when annualised.
In 2019, then-shadow treasurer Chris Bowen criticised the lack of regulation, claiming that in some instances Australians could end up paying back more than eight times what they borrowed.
— Chris Whitehead (@cwozzie) March 25, 2019
Rather than be subjected to stricter regulation, much of the debt sector has skirted increased scrutiny. Regulator ASIC instead intervenes when it sees a contravention, such as commencing action against payday lender Cigno last year.
“While the loans are commonly only for small amounts, they impose exorbitant fees that left some people purportedly owing amounts many times the value of the original loan, within months,” Consumer Action CEO Gerard Brody said.
If you’re struggling with debt, contact the National Debt Helpline.
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