Beforepay tanked 44pc on debut, but CEO Jamie Twiss insists his ‘not BNPL’ stock will disrupt the market
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It wasn’t the perfect start for pay-day lending provider Beforepay (ASX:B4P), as the new entrant tumbled 44% on its ASX debut yesterday, making it one of the worst ASX debut performances in the last 12 months.
The Sydney-based company had earlier raised $35m in the IPO round priced at $3.41 per share, with backing from a network of investors including Sydney-based fund Alium Capital. Prior to IPO, B4P backers at the venture capital / seed stage included Vocus founder James Spenceley.
Branded as the new Afterpay, the crash signals to the growing wariness of an overcrowded fintech segment fraught with huge near term challenges.
Strictly speaking, Beforepay’s business model isn’t the same as a traditional BNPL provider but it essentially makes money the same way – by providing advanced payments to customers.
Where Afterpay and Zip advance funds to buy items, Beforepay lends money against the customer’s next pay cheque, charging a flat 5% for the service.
“I wouldn’t call Beforepay a BNPL player though,” said CEO Jamie Twiss, who spoke to Stockhead exclusively.
“We have some things in common with them, but BNPLs are always intermediated through a merchant who subsidise the transaction as a general rule,” he said.
“With pay-on-demand, which is our category, there is no third party merchant, and there’s no cross-subsidy or anything like that. It’s just a direct relationship with the end user.”
Beforepay’s app syncs with the end users’ bank account, which then automatically debits the customer’s wages (plus the 5% fee) when they land.
Sometimes called pay-day lending, this type of service has exploded during the pandemic, as more people grapple with financial difficulties.
According to Twiss, roughly half of all Australians have little or no savings and live from pay cheque to pay cheque, which is the exact market segment that Beforepay is targeting.
“We’re a pioneer and leader within this category, and if you look at our track record of what we’ve done over the 18 months since commercial launch, that’s exactly how it’s played out,” Twiss said.
Founded in 2019 by Tarek Ayoub, the company is practically a startup that’s managed to gain traction extremely quickly.
The platform reportedly attracted 20,000 users within a few weeks of launching in 2020, and has since grown to around 139,000 users.
As a result, its loan book has also grown by a massive 361% to $77m today, with an average payment of $260.
The loan is paid off within 15 days on average, compared to traditional BNPL platforms which could have outstanding balances for several months as repayments are made in instalments.
But the most interesting metric is the book’s credit default rate, which has declined from approximately 7% in December 2020, to only 3% today.
Investment into data science and technology has played a central role, says Twiss, who was Westpac’s former head of strategy before joining Beforepay in May last year.
“Beforepay is basically a data driven organisation, and we’ve invested a lot in building out risk models that are powered by artificial intelligence and machine learning.”
“Over the past year, our team has been building ever more sophisticated models that allow us to decide whether to offer a pay advance to somebody, and if so, by how much.”
According to the prospectus, in FY21 the company wrote off a total of $5 million, against $4.5 million of income.
Twiss is confident he could turn this around, saying that as the company’s technology matures and the data models become more sophisticated, the default rate will come down even further. This he says, will also stave off competition.
“Our big competitive advantage is we have more data than anyone else in this category. In Australia, we have over half a billion data points in our in our database,” he said.
“So for the long term trend, I’m hopeful we’ll still see continued declines in default rates.”
BNPL providers don’t charge interest, so they currently have an exemption under the National Consumer Credit Protection Act.
Pay-on-demand products like Beforepay also fit within this category, and are also allowed the same exemption under the national credit code.
Recently however, the Australian Competition and Consumer Commission (ACCC), which has ultimate regulatory power over the industry, has expressed concerns over the “trap” effect the platforms have on vulnerable consumers.
The Treasurer and RBA have also weighed in, and we’re now likely to see tighter regulations just around the corner.
It’s not specific to Australia, with the US Consumer Financial Protection Bureau (CFPB) also recently announcing an inquiry into the industry.
Concerns over regulations and intense competition have led to a selloff in the ASX BNPL sector last year, with some stocks trading at 50% below their peaks.
“The way we design our products is with the assumption that regulation will continue to evolve and potentially tighten over time,” Twiss explained.
“And indeed, they might tighten over time. And if and when that happens, we will of course adapt and respond.”
Twiss is reluctant to be drawn into a conversation on stock price valuation, but is confident the company has only just scratched the surface.
“We currently have 139,000 users but when we look forward, we believe that the target market here is in the millions. We see a very bright future for the company domestically, as well as overseas,” he said.
Twiss said Beforepay was created to disrupt other forms of lending, particularly credit cards.
“I see Beforepay as a company with a large addressable market. Tremendous momentum, and a lot of runway going forward.”