How lending startups like Afterpay make their money

Startups like Afterpay that allow consumers to ‘instantly’ borrow money for purchases are using a business model that has been around for centuries.

It’s called “factoring” of accounts receivables. This is when a company sells its accounts receivables (money owed for a good or service that has already been delivered) to a lender, typically at a discount.

Typically, factoring arrangements are between a business and a lender, with the customer being oblivious to the arrangement. Afterpay’s innovation was to turn this centuries-old, back-office financial arrangement into something customer-facing.

In 2016-17, Afterpay generated about $23 million in fees from retailers and another $6.1 million in late fees. It wrote off only $3.3 million in bad debt.

An example of traditional factoring would be a company selling $100 in accounts receivables to a lender for $95. The company gets $95 cash up front (to spend on wages or ingredients) and eliminates the risk of not being paid. The lender makes a $5 profit once the $100 has been collected.

Similarly, if you make a $100 purchase using Afterpay, the merchant immediately receives $96. Afterpay then collects four instalments of $25 from the customer, making a $4 profit.

The $4 difference is essentially the interest that Afterpay charges (equivalent to 4.17%). The unusual nature of the transaction is that Afterpay lends to the business and the customer repays Afterpay. Read more

Saurav Dutta - Smart Company - 11 Dec 2017

Comments

We welcome relevant, respectful comments.
Please read our Comment Policy before commenting.
We also welcome direct feedback via Contact Us.
You may also want to ask our librarians.

Congratulations on the excellent work, impeccable content!
Será Consorcio Cancelado de Imóvel Posso Pedir o Ressarcimento, São Paulo - SP

The site has improved a lot, completely falls in love!
Saiba mais sobre Recuperar Valores de Consorcio, São Paulo - SP

Obrigado por nos escrever. Agradecemos as informações úteis.clinica de recuperação