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RUBY:

From Schwartz Media, I’m Ruby Jones. This is 7am.

In 2014, two friends from Sydney created a company that transformed the way we buy and sell things online.

Archival Tape -- Unidentified Reporter:

“The service offers a fee-free payment plan which has retail businesses and shoppers signing up in droves.”

RUBY:

That company, AfterPay, has become a bedrock of the online shopping experience, growing exponentially every year.

Archival Tape -- Unidentified Reporter:

“The shares rocketed from three dollars to more than 150 in three and a half years.”

RUBY:

It’s success was cemented when it sold to US tech giant Square, for 39 billion dollars - the largest corporate deal in Australian history.

Archival Tape -- Unidentified Reporter:

“It meant Afterpay, which has never made a profit and has net assets of under a billion dollars, was valued at more than Coles, Woodside and BlueScope Steel...”

RUBY:

AfterPay promises the allure of credit-free online shopping. But just how different is it’s business model compared to traditional credit cards and loans? Today, contributor to The Saturday Paper, James Hennessy, on the rise of Afterpay, and the regulatory loopholes it has exploited to build a multi-billion dollar business.

It’s Thursday, August 12.

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RUBY:

James, you've written quite a lot about the huge growth of services like Afterpay. What is it that you find interesting about them? Have you used Afterpay yourself?

JAMES:

I have used Afterpay myself, yes, but the thing that I find most interesting about is, it feeds into like , obviously a bigger trend about the development of technology over time and trying to use that technology to speak to the tastes of a new generation. Right?

So we're kind of at the point in the development of the Internet and Internet finance, where things are moving very, very quickly. And obviously, younger people, millennials, Gen Z especially, have different tastes to their parents and how they spend and save money and Afterpay, I think, is very shrewd about how it targets that. So that's something that I found really interesting from the get go.

RUBY:

Ok and before we get to this kind of rapid change - can you take me back and tell me about the company itself? How did Afterpay begin?

JAMES:

Sure. So Afterpay was founded by two guys...

Archival Tape -- Unidentified Reporter:

“Nick Molnar and Anthony Eisen were neighbours in Sydney. One day they got chatting, as good neighbours do, and came up with a simple idea…”

James:

So Nick, who is now Australia's youngest billionaire, is basically the son of a eastern suburbs of Sydney jewellery/retail family.

Archival Tape -- Nick Molnar:

“For some background on me, I’m a serial entrepreneur, which basically means I’ve never had a secure paycheck.”

JAMES:

And basically what happened is Nick was, ever since he was a teenager, selling the family's jewellery stock on eBay and making quite a bit of money doing that.

Archival Tape -- Nick Molnar:

“One thing led to another. And, you know, before I knew it, I sold the most jewellery on eBay out of my bedroom while at university.”

JAMES:

And Anthony Isen, who is sort of a bit older, he's a bit older than Nick and sort of has a pretty standard Australian corporate career.

Archival Tape -- Unidentified Reporter:

“Did you know Nick?”

Archival Tape -- Anthony Isen:

“I didn't know him but in my regular job of putting out the rubbish, you know, you get to meet the neighbours sometimes. Of course, Nick didn't put out the rubbish. It was his father.”

JAMES:

And basically they met as neighbours living in Rose Bay in Sydney.

Archival Tape -- Anthony Isen:

So, you know, from across the road, we started a conversation…”

JAMES:

The core of the Afterpay business came when Nick was working on the family's online jewellery store, which was called Ice Online, as Nick's mother tells it, the original idea came because plenty of customers were getting to the checkout and not closing their sales. And they were trying to work out why that was and what they could do to resolve that problem. You know, that's a problem sort of as old as business itself. And credit is how you resolve that. But I think Nick realised that wasn't enough. They needed to work on a new sort of product to make that work. And that's kind of where AfterPay was born. And since then, it's obviously been a pretty meteoric rise.

Archival Tape -- Unidentified Reporter:

“Two mates from Bondi Beach are now the ones laughing all the way to the bank after selling their company Afterpay for almost 40 billion dollars.”

Archival Tape -- Anthony Isen:

“It almost sometimes doesn't feel real.”

RUBY:

So Afterpay was sold for almost 40 billion dollars recently. Why? What is it that makes Afterpay unique?

JAMES:

So the unique proposition of Afterpay is that it is zero interest. So basically what happens is that you will purchase a product online. You might go to a fashion retailer online and you'll get to the checkout. And instead of putting in your payment details, you log in your Afterpay account and see what happens then is you will get the product immediately and then you'll pay it off over four instalments. So if you are a customer, the appeal is really obvious. So then obviously the question is what is the appeal for the retailer?

What they get out of it is Afterpay’s user base. Afterpay’s user base are young, they're predominantly under 30 and they actually pay quite substantially for that privilege. The transaction fees on the retail side or the merchant side, they charge a flat fee on all transactions and then about four to six percent of the total price. That's a lot more than they would be paying for, say, a MasterCard transaction, So, basically the business model here is, is that they've kind of figured out a way to make the retailers pay for the credit side of things. That doesn't mean that it's not credit. Obviously, if you're getting if you're spending money that doesn't belong to you, that's credit. That isn't your money. But they have tweaked the relationship to appeal to a generation who don't like credit cards. And that's the key.

RUBY:

Ok so AfterPay’s business model - it’s credit, it does still require users to make repayments but they differentiate themselves from traditional credit cards, particularly in the way that they market themselves. Can you tell me a bit more about that: what is their pitch, and how do they sell themselves to consumers?

JAMES:

So their app and the purchase process is very slick. It fits really well with the processes that younger consumers are kind of acclimatised to by using social media and using apps on their smartphone.

Archival Tape -- Rebel Wilson:

“...If credit cards and cash had a baby, you could pay overtime without ever paying interest..”

JAMES:

They're big sort of selling point is they pitch themselves as being a better option than credit cards.

Archival Tape -- Rebel Wilson:

“Like get lost, don't come near me interest. No way. Get out of town. All right. You don't want interest. I'm telling you.”

JAMES:

Young people don't really like credit cards. It's been a long documented trend that millennials and Gen Z are moving away from credit cards. I think was a Reserve Bank in 2013, said that millennials were using credit cards for 50 percent of online card transactions versus 80 percent for every other demographic group. And that's only declined from there.

Afterpay’s pitch is: we know that you don't like the confusing and sort of difficult interest rates and payment schedules so we're going to give you something simple and transparent and easy, and that's translated very well.

But at the end of the day, and I think what regulators are trying to get their heads around, is the fact that, it may look different, it may look nicer, but, you know, this is credit. And if you look at the sector holistically and people can access these products very, very easily across a range of companies, you start seeing some significant debt risk for young people.

RUBY:

We’ll be back after this.

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RUBY:

James, we’re talking about the appeal of Afterpay - specifically for millennials which is a generation that is typically wary of credit cards and getting into debt. Can you tell me a bit more about why that is - why younger people in particular have been so focused on avoiding a debt trap?

JAMES:

I think there's a few reasons.

Archival Tape -- Unidentified Reporter:

“It remains the biggest bankruptcy in US history, brought about because lenders had given money to people who couldn’t repay.”

JAMES:

One of the ones that gets attributed pretty commonly is that millennials, a good chunk of the cohort, grew up and came of age amid the embers of the global financial crisis.

Archival Tape -- Unidentified Reporter:

“This could be the most serious recession in decades…”

JAMES:

So there's sort of a political situation there and an understanding and a fear around accruing debt and how that looks and the effects that can have on people.

Archival Tape -- Unidentified Reporter:

“Jobs have become a scarce commodity and young people are worried they will become part of a lost generation…”

JAMES:

Secondly the parents of millennials, the baby boomers, were one of the first generations to really widely from the dot be using credit cards. And I think people have seen the impact of that and are looking for another way to do it. One that doesn't have or doesn't, at least doesn't appear to have, as many risks.

Archival Tape -- Unidentified Speaker:

“Credit card debt, up, car loans commonplace, student fees taking a lifetime to pay off, hard to argue with the idea that we have become addicted to debt…”

JAMES:

And I think the third one is sort of a broader economic story about precarity, right? Younger people tend to be in a more precarious position financially. They don't have access to all of the greater wealth generation avenues their parents did.

Archival Tape -- Unidentified Reporter:

“Millennials have less than half the net worth of boomers and their home ownership rate is lower while their student debt is drastically higher…”

JAMES:

So there's kind of a lot of factors that coalesce around the fact that they don't like traditional debt. They don't like the way that it develops, and they don't like the way that the obvious debt traps. So one of the other, the core aspects of Afterpay’s success is that they, by not being treated like credit by Australian regulators. They've been able to get away with activity that credit card providers wouldn't be able to get away with.

RUBY:

Mmm, can you tell me more about that? What are they getting away with that more traditional lenders aren’t able to do?

JAMES:

So, by not charging interest, they have put themselves in a position where the Australian government, for example, in the early days when the regulators were first sort of saying this ‘buy now pay later’ model, they were thinking, you know, what is this? Let's start doing some investigation, work out what's going on with it. It was back in 2009, I believe it was a Senate enquiry first decided, OK, well, they're not charging interest, so we're not going to compel them to have to perform credit checks. And that's been a massive boom for them and a kind of a bee in the bonnet of Australia's banks who obviously do have to perform credit checks. Now, what Afterpay argues is that credit checks, you know, they're outdated, they're inflexible. They don't reflect the modern consumer and their capacity to pay for things. Obviously that's branding talk. And you can argue about whether it's the case. But it's certainly been hugely beneficial for after paying not having to do credit checks.

Obviously, this is across the entire sector. You can sign up for Afterpay, you can sign up for Zipp, you can sign up for some, you can sign up for PayPal's pay and 4, you can sign up for all these, buy now pay laters which there are a multiplying number and start making purchases on all of them and then automatically you are serious strife. There are so many options in this space now. And I think that's what regulators are now kind of getting their heads around and trying to work out if this is something they need to address. So they are really thriving in the gaps of regulation.

RUBY:

Yeah, so when we look at Afterpay, taking into account the number of people who are using it, it's growth, these other similar companies that are popping up, the lack of regulation in this space, this kind of slick marketing that we're seeing, which is about selling what you say is essentially credit. Is there a risk here of not just an individual debt spiral, but a generational one?

JAMES:

Yeah, I think that's a live possibility. And I think the real risk is in accepting the marketing. Right? I think that's the real risk on a generational level. That, you know, we have used technology to solve the problem of debt, which is, you know, at the end of the day, the pitch right? they’re saying, you know, obviously there's been individual risks there being generational risk has been systemic risks in the past from debt. And basically, we have a better solution for you that works better, works better for everyone, and it's much safer and it's much nicer. And I think any time we're talking about people spending money they don't have. You do have generational risks and that's just something to be aware of and not be taken in by the marketing.

RUBY:

James, thank you so much for your time.

JAMES:

Thank you.

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RUBY:

Also in the news today...

NSW recorded 344 new cases of Covid-19 and two deaths on Wednesday. More parts of regional NSW have entered into lockdown including Dubbo where two cases were recorded. In Victoria, Melbourne’s lockdown has been extended by another seven days after 20 new Covid-19 cases.

And in Afghanistan, the Taliban has captured two more regional cities, taking the number of seized provincial capitals to eight in the past week. Large parts of rural Afghanistan are now controlled by the Taliban, after the group launched a series of offensives in May that coincided with the withdrawal of foreign troops. Since the offensives began, an estimated 400,000 people have been internally displaced.

I’m Ruby Jones, this is 7am. See ya tomorrow.

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