First Look at Afterpay Touch Installment Loans

Afterpay, an Australian lending company, is launching in the U.S. market. We go over the product, and whether this is good or bad news for consumers.

Afterpay Touch Group (APT.AX), an Australian installment loans company, is expanding its operations into the US market. The lender announced earlier this week that it will begin operations by partnering with Urban Outfitters, one of the largest clothing retailers in the nation.

Critics have claimed that Afterpay enables poor financial decision-making by allowing consumers to dig themselves into debt with purchases they can't afford. However, Afterpay's financial data suggests it is highly selective in who it lends to, resulting in low default rates and relatively few fees charged to consumers—especially when compared to more traditional loan products.

Key Takeaways

  • Afterpay offers an alternative to credit cards. It can provide credit with no interest and no fees, provided consumers pay off their installment loan on time.
  • The company is hugely popular with Millenials in Australia, who use it as a budgeting tool.
  • Afterpay will face competition from San Francisco-based Affirm, which provides a similar service.

Afterpay's biggest competitor in the US will be Affirm—a company specializing in the same type of layaway service. Both companies offer comparable products, though Affirm—founded by PayPal's Max Levchin—has a significant leg up as it launched in the U.S in 2012 and has raised $720M to-date. Affirm already works with over 1,000 retailers, including heavy-hitters like Casper, Wayfair and Expedia.

Unlike a traditional credit card, purchases made through Afterpay do not incur interest charges. Instead, customers are put onto a payment plan that completely pays off a charge within a few months. The average user takes 30 days to pay back the loan.

While there are late payment fees, a majority of Afterpay's customers do not have to pay them. As of Q1 2018, 93% of Afterpay orders never incurred any late fees.

Afterpay also boasts strict underwriting procedures, which have allowed it to keep delinquencies relatively low while operating in Australia. Afterpay does not rely on traditional models like FICO, which may leave some unbanked consumers without access to traditional lines of credit. The company uses alternative data and proprietary risk-assessment models to evaluate everyone who applies for a loan.

While a consumer with an open line of credit may continue to make purchases they can't afford until they hit their credit limit, Afterpay users are evaluated for each purchase. Users who have taken on too much debt or have struggled to make payments in the past can be cut off from future loans.

AfterpayAffirmCredit Card Averages
Average Transaction Size$150$750$91
Average Default Rate/Bad Loans1.5%Does not disclose2.48%
Interest Rate (APR)0%10% - 30% (0% available at some retailers)8% - 29.99%
Late Payment PenaltiesUp to 25% of total orderNoneUp to $38

Source: Goldman Sachs Report & ValuePenguin Analysis

In Australia, Afterpay has been most popular with Millennials and Generation X. Over 90% of their customer base was made up of these age groups. It's likely that Afterpay will pursue a similar demographic in the US. Recent research from Visa shows that a growing number of Millennials are shunning credit cards as a financial product, leaving them open to alternative forms of credit.

Ultimately, merchants will pay for Afterpay's services. The company charges retailers a 4% fee for processing payments. For example, if a shopper takes out a $100 loan to pay for a dress, the store will receive just $96. The customer will need to repay Afterpay the full $100, meaning the company gets to keep a $4 profit.

Beyond that, the company's long-term goal is to serve as a data miner. As it grows and accumulates information on retailer and shopper patterns, it will have valuable insights into consumer purchasing decisions.

Joe Resendiz

Joe Resendiz is a former investment banking analyst for Goldman Sachs, where he covered public sector and infrastructure financing. During his time on Wall Street, Joe worked closely with the debt capital markets team, which allowed him to gain unique insights into the credit market. Joe is currently a research analyst who covers credit cards and the payments industry. He earned a bachelor’s degree from the University of Texas at Austin, where he majored in finance.

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