Afterpay will become a bank in October, removing intermediaries by allowing customers to deposit their pay directly on its platform.
The buy now, pay later (BNPL) giant has said it will offer no-charge bank accounts with a 1% savings rate in a bid to convince millennials to part with their established bank.
Everything is legal under the umbrella of Westpac’s banking license, which was extended to Afterpay’s “Afterpay Money” brand in October.
But it’s unclear how Afterpay will use customer bank data to advance its expense-driven business model, where millions of dollars are raked in late payment fees each year.
“Combining money management with the BNPL offering will allow us to help customers spend, save and play,” Lee Hatton, director of Afterpay, said Tuesday in a statement to investors.
“We will provide new and unique features to customers. “
The latest announcement comes less than a week after Afterpay shares fell on news that tech giants Apple and Paypal would enter the BNPL market with offers that directly target Afterpay’s model.
All of this in response to the gold rush in financial services brought on by an influx of mostly young customers, abandoning traditional credit cards and the big banks that sell them.
The move will allow Afterpay to expand its reach from retail payments to the core financial affairs of its clients, while Westpac will secure a share of the fast-growing BNPL market after Commonwealth Bank strikes a deal with rival BNPL provider Klarna. in 2019.
Competitive savings rate
Afterpay’s new banking app will be called Money and is open to Australians with BNPL accounts, including three million existing customers.
In addition to deposit and savings accounts, the app will also offer free debit cards and digital wallets to customers.
The 1% savings rate is more than double the 0.4% rate offered to most Westpac customers, but lower than the highest market rates at banks like ING (1.35%) and AMP Bank (1.25%).
And ironically enough, given that Afterpay targets millennial customers, if you’re between 18 and 29, Westpac’s Life account will offer a much higher savings rate of 3% if you have a deposit of less than $ 30,000. $.
The main difference with Afterpay’s product is that it will not attach any savings or spending conditions to its savings rate – which RateCity Research Director Sally Tindall called a very attractive offer. .
“It’s a really smart offer – they took out the sticky terms,” Ms Tindall said. The New Daily.
“Afterpay is offering 1% on balances up to $ 1 million on each of 15 different savings accounts.”
In other words, if you have $ 15 million lying around, Afterpay will be the leading place in the market to park your pocket money.
But if you have less than $ 100,000 in savings, you’ll likely find a much better deal elsewhere.
Should you bank with Afterpay?
Although Afterpay’s savings rate is competitive, the ambitions of the giant BNPL to become a banking service raise serious questions.
For starters, Afterpay makes money by convincing you to spend, not save.
Short-term credit will remain the main driver of the business, although the company insisted on Tuesday that it wanted to help people take control of their finances by offering savings without stress and without complex conditions.
Ms Tindall said the proof would be in the pudding, especially with regards to how Afterpay will split the data between spending and savings in its business.
“On the one hand, this is a great opportunity to do more comprehensive credit checks on BNPL clients,” Ms. Tindall said.
“[On the other], their platform mainly focused on spending and the two don’t necessarily go together.
“If they turn this upside down and try to encourage people to spend and budget, then it will be interesting to see if people start spending less. “
Research by corporate regulator ASIC previously found that around 20% of BNPL customers struggle to repay debts on platforms like Afterpay.
These debts then prevent them from meeting other financial obligations, according to the research.
Afterpay’s banking app will allow users to track upcoming credit repayments in a way that could help them avoid late payment charges.
But it could also be used to entice customers to spend even more money.
Afterpay said it would allow customers to open up to 15 accounts because it wanted to help them target “different savings goals and buy different things based on their specific needs.”
A spokesperson for Afterpay said the BNPL application and the Money application will be widely separated, “to respect the separation of the two experiences.”
But they said there would always be a cross between the two services.
“We will provide a link to the store app in the money app and also opportunities in the future to link wishlist items in the store app to savings goals in the application of money, “said the spokesperson.
“But it’s important that we follow the customer’s lead and respect their signals. “