Sharper lending algorithms and “more affluent” users turning Beforepay to profitability, CEO says

The fortunes of pay-in-advance fintech Beforepay appeared to shift on Thursday, after a new report contrasted losses against rapid customer growth and a significant reduction in debt write-offs.

Beforepay, launched in 2019, takes cues from the buy now, pay later sector with its spin on payday advances.

The Australian fintech offers users a short-term advance on their pay, generally up to $200, before automatically deducting those payments — plus a 5% service fee — when those users are paid.

The company made headlines in January when its shares tumbled some 42% in the hours after its ASX debut, driven by investor concerns over customer default rates and broader market unease afflicting tech stocks.

Nevertheless, Beforepay’s active customer base grew to more than 158,000 in the March 2022 quarter, the company said Thursday, representing a 14% growth from the December quarter and a doubling from March 2021 levels.

Perhaps more significant for the fintech is the improvement of its net transaction margin, which sat at $1.05 million in March 2022, compared to a loss of $750,000 in the prior corresponding period.

Driving that turnaround was a drop in net transaction loss — that is, expected and actual credit losses as a percentage of Beforepay advances and fees.

Net transaction losses sat at 2.2% in March 2022, Beforepay said, down from 3.1% the previous quarter and 5.3% in March 2021.

Marketing costs more than doubled over the year to $6.4 million in the March quarter, but the company maintained it is on a positive trajectory.

“Continued momentum in user growth, revenue uplift, and strengthening margins represent another step forward on our path to profitability,” CEO Jamie Twiss said in a statement.

Shares rallied as much as 7.83% in the hours after the interim report was released, the Australian Financial Review reports, but remain well below their January list price of $3.41.

Sharper algorithms behind the turnaround: CEO Jamie Twiss

Speaking to SmartCompany, Twiss says a significant improvement to its risk assessment algorithms was behind that decline in credit write-offs.

Marking another parallel to buy now, pay later providers, Beforepay does not conduct traditional credit checks, instead relying on an in-house screening and verification system.

“Those algorithms — as we feed them more and more data, as our team of data scientists, which is an area we invested in quite heavily, keeps working on refining and improving those models — their predictive power has gotten sharper and sharper,” he said.

“And so as these models keep getting better, and keep getting smarter, with more and more data, that’s enabled us to make better and better decisions about who will receive a pay advance and who won’t, and then what limit we’ll assign to that person.”

The average Beforepay user’s earnings also climbed over the year, from $44,458 per annum in March 2021 to $56,182 per annum in March 2022.

The fact Beforepay customers have become “more affluent” has “also been a helpful driver of reduced net transaction loss”, Twiss says.

“We’ve always expected that our average customer would look like the average Australian and then indeed, that’s what we’re seeing,” he added.

Report backdropped by cost of living fears

Beforepay’s results are backdropped by skyrocketing inflation, lifting the cost of essential goods and services while outstripping average wage growth.

Underlying inflation of 3.7% sits well above the Reserve Bank of Australia’s target band of 2%-3%, and mainstream economic sentiment now predicts the central bank will lift interest rates in May as a result.

Even before the appearance of those price pressures, critics of pay advance services, including the Consumer Action Law Centre, expressed concerns that pay on demand services may offer advances some users cannot afford to pay back.

“As a member of Australian society, I’m concerned about the macroeconomic health of the country,” Twiss said, while maintaining Beforepay acts as an “ethical and customer friendly alternative” to traditional payday loans.

The Beforepay report also noted the short-term duration of its loans means a 1% interest rate hike would grow the cost of an average pay advance to 0.56% of the amount advanced, up from 0.52%.

“I’m very pleased by these results,” Twiss said.

“And I think we continue to show that the product is working well for customers, that we’re creating value, and that the future for the company is bright.”