Afterpay will become a bank in October, cutting out the middle man by allowing customers to drop their pay directly into its platform.
The buy now, pay later (BNPL) giant says it will offer no-fee bank accounts with a 1 per cent savings rate in a bid to convince millennials to part ways with their established bank.
It’s all legal under the umbrella of Westpac’s banking licence, which was extended to Afterpay’s brand ‘Afterpay Money’ in October.
But it’s unclear how Afterpay will use customers’ banking data to advance its spending-focused business model, through which millions of dollars are reaped from late payment fees every year.
“Combining money management with the BNPL offering will allow us to help customers spend, save and play,” Afterpay executive Lee Hatton said in a statement to investors on Tuesday.
“We will deliver new and unique features to customers.”
The latest announcement comes less than a week after Afterpay shares plummeted on the news that tech giants Apple and Paypal would enter the BNPL market with offers that directly target Afterpay’s model.
It’s all in response to the gold rush in financial services brought on by a flood of mainly younger customers ditching traditional credit cards and the major banks that sell them.
The move will see Afterpay extend its reach from retail payments to the foundational financial affairs of its customers, while Westpac will get a piece of the fast-growing BNPL market after Commonwealth Bank struck 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 a BNPL account, including three million existing customers.
In addition to deposit and savings accounts, the app will also offer debit cards and digital wallets to customers free of charge.
The 1 per cent savings rate is more than double the 0.4 per cent rate offered to most Westpac customers, but lower than market-leading rates at banks like ING (1.35 per cent) and AMP Bank (1.25 per cent).
And rather ironically given Afterpay is targeting millennial customers, if you’re aged 18 to 29 then Westpac’s Life account will deliver a much higher 3 per cent savings rate if you have a deposit of less than $30,000.
The key difference with Afterpay’s product is that it will attach no savings or spending conditions to its savings rate – something that RateCity research director Sally Tindall called a very attractive offer.
“It’s a really clever offering – they’ve scrapped the tricky terms,” Ms Tindall told The New Daily.
“Afterpay is offering 1 per cent on balances up to $1 million on each of 15 different savings accounts.”
In other words, if you’ve got $15 million lying around, Afterpay will be the market-leading place to park your spending money.
But if you have less than $100,000 in savings, then you’re likely to find a much better deal elsewhere.
Should you bank with Afterpay?
Although Afterpay’s savings rate is competitive, there are big question marks around the BNPL giant’s ambitions to become a banking service.
For starters, Afterpay makes money by convincing you to spend, not to save.
Short-term credit will remain the company’s main money spinner, even though the company was adamant on Tuesday that it wants to help people take control of their finances by offering stress-free savings without complex conditions.
Ms Tindall said the proof will be in the pudding, particularly when it comes to how Afterpay will share data between the spending and saving parts of its business.
“On one hand, this is a great opportunity to do more comprehensive credit checks on BNPL customers,” Ms Tindall said.
“[On the other], their platform has primarily focused on spending and the two don’t necessarily go together.
“If they turn that on their head and their focus is on encouraging people to spend and budget, then it will be interesting to see whether people start spending less.”
Research by corporate regulator ASIC has previously found about 20 per cent of BNPL customers have had trouble repaying their debts on platforms like Afterpay.
Those debts then make it difficult for them to meet other financial obligations, the research found.
Afterpay’s banking app will allow users to track upcoming credit repayments in a way that could help them avoid late payment fees.
But it could also be used to prompt customers to spend even more money.
Afterpay said it would allow customers to open up to 15 accounts as it wanted to help them target “different savings goals and to purchase different things based on their specific needs”.
An Afterpay spokesperson said the BNPL app and Money app will be kept largely apart, to “respect the separation of the two experiences”.
But they said there will still be crossover between the two services.
“We will offer a link to the shop app in the money app and also opportunities in the future to link wish list items in the shop app to savings goals in the money app,” the spokesperson said.
“But it is important we follow the lead of the customer and respect their cues.”