Afterpay tightens lending requirements in response to COVID-19

Photo by Makenna Entrikin on Unsplash

Buy now, pay later giant Afterpay has announced a tightening of its lending requirements in an effort to avoid being hit hard by COVID-19.

In an ASX trading update yesterday, Afterpay (ASX:APT) announced it has still posted strong performance across the business in the three months to 31 March 2020 (Q3 FY2020), with underlying sales up 97% to $2.6 billion from the same quarter in 2019. 

However, these results only represent a small portion of the timeframe influenced by COVID-19, with restrictions and shutdown measures only put into place from mid-March onwards. 

Global sales in the second half of March were only down by 4% compared to the first half of the month, with online sales increasing by 8%. 

Sales in the first half of April have also been positive, with daily underlying sales up 10% on the second half of March.

Nonetheless, Afterpay announced a number of "risk setting modifications" implemented to address the global economic indicators, with a focus on "limiting losses, preserving margins and protecting a strong balance sheet".

The key steps taken by Afterpay include: 

• Tightening spending limits across a number of customer risk profile tiers, with a focus on skewing sales towards lower-risk and higher-performing customers (i.e responsible customers who regularly meet their repayments)
• Tightening transaction approvals for higher-risk and luxury products (such as jewellery), with new customers facing higher levels of scrutiny on such purchases 
• Making most customers pay their first installment upfront

Afterpay noted that more customers made hardship claims in mid-March than usual, although these numbers have started to trend down again. 

It also said it stands ready to introduce further restrictions on spending should there be a continued deterioration in customer repayments. 

Afterpay chief executive Anthony Eisen said Afterpay was well placed to deal with the effects of COVID-19. 

“Our dynamic business model and strong balance sheet means we are well positioned to respond and adapt through this period," he said. 

"We are confident that our customer-centric model, which encourages budgeting and responsible spending, will be even more relevant in a post COVID-19 environment."

Afterpay's report also notes that government stimulus measures are already having a positive impact on consumer confidence during this period. 

Zip calls on government to protect fintechs 

Fellow buy now, pay later (BNPL) juggernaut Zip Co (ASX: Z1P) has also recorded strong quarterly growth, noting in an ASX report last week it had seen a year-on-year revenue growth of $45 million, or 96%.

Zip Co Larry Diamond has applauded the government's "bold and decisive action" to keep Australians employed during COVID-19, but says more needs to be done for fintechs like Zip. 

"Zip would also like to encourage the government to broaden the eligibility of the financial sector-specific packages to include fintechs, who add a vital, competitive and innovative segment to the market," Mr Diamond said. 

"We continue to believe the credit card model is broken with customers in need of flexible, responsible, interest-free alternatives."

In terms of lending requirements, Zip noted in its report that it has already adjusted its application algorithms and is using real-time portfolio management tools to actively monitor account behaviour and adjust credit limits accordingly. 

It also noted that the average age of a Zip customer is close to 35, older than that of other BNPL services, and represents a more "financially savvy" customer segment. 

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