Payday lender Beforepay achieved a three-fold increase in pay advances over the year to June and has declared that if it maintains that momentum, while holding costs in check, it will break even over the next couple of years.
Launched in August 2020 and listed on the ASX with a A$30 million equity raising in January, Beforepay advanced $327.3 million in the year to June – up from $93.1 million the previous year.
The number of active users rose from 102,621 to 173,398 over the year.
Income rose from $4.3 million to $15.3 million but after spending $12.8 million on advertising and marketing, $8.1 million on credit loss provisions and $2.1 million on IPO costs, along with other expenses, it made a loss of $29.1 million, compared with a loss of $18.7 million in 2020/21.
Beforepay is currently advancing an average of $300 per transaction, with repayment over three weeks. It charges a 5 per cent fee for each advance, with no other transaction or late fees.
The company’s chief executive James Twiss said he is confident the company can maintain its current cost base and, with a net transaction margin currently at 2 per cent, monthly advances of around $100 million would be the break-even point.
The net transaction margin (revenue less net transaction loss, funding costs and direct costs) for the year was 1.1 per cent but it increased to 2 per cent by the end of the financial year.
A big part of the margin improvement was a steady decline in loan losses, which the company had identified as one of its most important objectives. Losses (net of recoveries) fell from 5.2 per cent of advances in 2020/21 to 2.4 per cent in the year to June.
Twiss said that over the course of the year the company put tighter eligibility criteria in place to ensure it was issuing pay advances to suitable customers. It has been able to refine its risk model using its growing body of transaction data and has had its data scientists hard at work on “hyperparameter tuning and testing”.
The company uses an algorithm to tailor advance limits that reflect the riskiness of the customer.
Absent from Twiss’s comments yesterday was any reference to the contribution benign credit conditions, with low unemployment, high savings rates and low arrears rates reported across the industry, made to the decline in the company’s loss rate.
It will be interesting to see how well the hyperparameter tuning holds up when rising interest rates and higher inflation really start to bite.
Twiss said the company’s own funding has a low sensitivity to rising rates. Its $45 million debt facility ($20.6 million drawn) has an interest rate of 11.77 per cent, but with advances turning over every three weeks the funding cost per transaction is 52 basis points.
Twiss said Beforepay will remain a specialist “pay on demand” finance company, with no plans to diversify. He said there may be opportunities for the company overseas but it has no plans for international expansion.
And he said the company has sufficient resources to