Grant Halverson, CEO and MD at McLean Roche Pty Ltd, has noted that Fintech-related risk has increased dramatically this year and has been “aided by ‘free’ central bank money, exuberant VCs, private equity and run away share markets.”
Halverson pointed out that Australian Buy Now, Pay Later (BNPL) Fintech Zip will be raising as much as $150 million in capital to expand its operations globally. Many of these so-called BNPL products are not well regulated (or even unregulated) in Australia and New Zealand, Halverson claims.
He also mentioned that Australian investors are increasingly investing or have expressed an interest in publicly listed BNPL businesses. Meanwhile, Australian banks who manage securitized receivable programs are “at risk” and investors (mostly VCs) could be at risk for investing in private BNPL companies, Halverson noted.
He pointed out that in Australia, the National Consumer Credit Protection Act 2009 (NCC) doesn’t apply to certain types of loans, which includes “low-cost short-term credit less than 62 days.” He further noted that New Zealand has a Credit Contracts Act which exempts Lay-buy programs.
“Zip’s $150 million capital raising last week will mostly be spent out of Australia. Zip’s $138 million split: $85 million in USA, $15 million in UK and $35 million investing in minority stakes in two BNPL platforms in UAE, Poland and Czech Republic – great synergy there. Zip’s local SME expansion costs $12 million [and] includes a partnership with Facebook allowing SMEs to buy advertising – lending to small business that doesn’t sound risky at all!”
He also mentioned that local investors are financing another global expansion effort by a BNPL app along with Afterpay, which is now in 11 different markets. Four other ASX listed BNPL stocks are also not doing any major business in Australia, Halverson revealed.
“Given BNPL is totally unregulated and in recent weeks regulators ASIC and the RBA have declined to act, while Liberal politicians have publicly stated these tech start-ups should not be ‘stifled’ by regulation. The key question is who [will absorb] the risks?”
He points out that it’s “a fascinating situation that key regulators are not prepared to act – a very similar situation to Wirecard in Germany.” He also noted that “glamor” Fintech firm Wirecard pretty much collapsed in June of this year, costing investors as much as $12.5 billion due to fraud and major auditing issues.
Halverson goes on to mention that BNPL apps handle payments a lot faster than traditional banks while providing client loans and services to manage their risk and they also use customer’s data.
Tech giants such as Amazon and Google parent Alphabet are also increasingly providing financial services but “operate largely outside regulation,” Halverson claims.
“Australian BNPL apps have revenues A$891 million, receivables A$1.76 billion, bad debts A$262.5 million (30% of revenues) and accumulated losses A$396 million and counting.”
While sharing other details about BNPL firms, Halverson notes that consumers are used as “off balance sheet” securitized borrowings. These companies have “very high” and “bad debts” averaging 30% of revenue, Halverson claims.
They also have “very high ‘late fees’ when converted to APR’s of up to 68%.” He further noted that BNPLs “typically don’t assess consumers’ ability to repay.” And most of them “do not use the credit bureau for new applications or update performance.” The “majority do not report payment obligations or default to credit bureaus,” Halverson claims.