More Accurate Lending Algorithms Turning Beforepay into Profitability, Says CEO
The fortunes of prepayment fintech Beforepay appeared to change on Thursday, after a new report contrasted losses with rapid customer growth and a significant reduction in debt forgiveness.
Beforepay, launched in 2019, draws inspiration from the buy now, pay later industry with its spin on payday advances.
The Australian fintech offers users a short-term advance on their salary, typically up to $200, before automatically deducting those payments — plus a 5% service charge — when those users are paid.
The company made headlines in January when its shares fell around 42% within hours of its ASX debutdriven by investor concerns about customer default rates and the general market malaise plaguing tech stocks.
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Nonetheless, Beforepay’s active customer base grew to more than 158,000 in the March 2022 quarter, the company announced Thursday, which represents a 14% growth from the December quarter and a doubling from the previous quarter. March 2021 levels.
Perhaps more important for the fintech is the improvement in its net trading margin, which stood at $1.05 million in March 2022, compared to a loss of $750,000 in the previous corresponding period.
This turnaround was driven by lower net trading losses, ie expected and actual credit losses as a percentage of advances and Beforepay fees.
Net trading losses were 2.2% in March 2022, Beforepay said, compared to 3.1% in 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 was on a positive trajectory.
“The continued momentum of user growth, increasing revenue and strengthening margins represents another step forward on our path to profitability,” CEO Jamie Twiss said in a statement.
Shares soared as much as 7.83% in the hours after the interim report was released, the Australian Financial Review reports, but remain well below their current January price of $3.41.
More precise algorithms behind the turnaround: CEO Jamie Twiss
Talk to SmartCompanyTwiss says a significant improvement in its risk assessment algorithms was behind the drop in credit write-offs.
Marking another parallel to buy now, pay later suppliers, Beforepay does not perform traditional credit checks, but instead relies on an internal screening and verification system.
“These algorithms – as we feed them more and more data, as our team of data scientists, which is an area where we have invested quite a lot, continue to work to refine and improve these models – their predictive power is become more and more precise”, he mentioned.
“And so as these models get better and smarter, with more and more data, it’s allowed us to make better decisions about who will get a salary advance and who won’t, and then what limit we are going to assign to this person.
Average Beforepay user earnings also increased over the year, from $44,458 per year in March 2021 to $56,182 per year in March 2022.
The fact that Beforepay customers have become “more affluent” has “also been a helpful factor in reducing net transaction losses,” says Twiss.
“We’ve always expected our average customer to look like the average Australian and that’s what we’re seeing,” he added.
Report amid cost of living fears
Avantpay’s results are supported by soaring inflation, raising the cost of essential goods and services while outpacing average wage growth.
Core inflation of 3.7% is well above the Reserve Bank of Australia’s 2% to 3% target range, and general economic sentiment is now predicting that the central bank will raise rates of interest in May accordingly.
Even before these price pressures emerged, critics of payday advance services, including the Consumer Action Law Centerfear that pay-on-demand services offer advances that some users cannot afford to repay.
“As a member of Australian society, I am concerned about the macroeconomic health of the country,” Twiss said, while maintaining that Beforepay acts as an “ethical and customer-friendly alternative” to traditional payday loans.
The Beforepay report also noted that the short term duration of its loans means that a 1% rise in interest rates would raise the cost of an average salary advance to 0.56% of the amount advanced, from 0. 52%.
“I’m very pleased with these results,” said Twiss.
“And I think we continue to show that the product works well for customers, that we create value and that the future of the company is bright.”