Visibility vital for lenders, Frollo says
Use of pay advance services almost doubled in 2022, a trend that Frollo says lenders are wise to consider when assessing credit applications.
Having analysed data from 33,050 users of its free Frollo Money Manager app, the open banking fintech said while buy now, pay later remained the more popular option, its data showed an uptick in pay advance transactions over 2022. Frollo is owned by NextGen, a leading tech provider to the finance industry.
Pay advance services (also known as “wage advance” or “pay-on-demand”) allow consumers to borrow money in advance of their next pay, for which they typically pay a flat service fee. Similar to receiving an advance on wages, the money is repaid on the borrower’s next payday.
The number of users with pay advance transactions grew from 1.4% in quarter one to 2.7% in quarter four, according to Frollo’s data, a portion that had almost doubled. Overall, Frollo said 5% of app users made at least one pay advance transaction over the year.
On average, pay advance customers spent $1,331 on repayments, fees and penalties, it said. In the months that pay advances were used, payments reportedly averaged $565.
The risk of using pay advance services is heightened among BNPL users, who Frollo said were 43% more likely to use a pay advance service.
With data showing both forms of credit continuing to play a role for consumers, Frollo said it was important that lenders take this information into account when providing credit. Equally, consumers need to be made aware of the potential impact of using BNPL and pay advance services, it said.
Frollo chief customer officer Simon Docherty (pictured above) said Frollo user data indicated that BNPL services and pay advance services would remain part of the consumer finance landscape for the foreseeable future.
Lenders therefore need to consider that a customer spending $500 per month on pay advance services may not be able to afford the same mortgage as someone who doesn’t, he said.
“So it’s essential to get visibility over this spending to reduce risk and lend responsibly. Both ING and Macquarie have recently announced that they will consider BNPL debts when assessing home loan affordability,” Docherty said.
Docherty said most BNPL debts aren’t registered, and most of these services don’t perform credit checks, an observation made by others within the broking industry. Lenders therefore cannot rely on credit scores for a complete picture, he said.
Although the Australian government has proposed new BNPL legislation, Docherty said it was unclear whether the reforms would cover reporting obligations.
Open banking is a solution for lenders, as it helps them to assess affordability for a home loan, manage risk and lend responsibly, he said.
“By analysing customers’ transactions across all their financial institutions, Frollo’s Financial Passport provides a complete view of their income, expenses, assets and liabilities – including BNPL and pay advance spending,” Docherty said.
“Lenders who want to improve their responsible lending practices, and how they manage risk, should consider using open banking data for their credit assessments.”
Frollo user data showed the number using BNPL grew throughout 2022, from 31.2% in quarter one, to 33.4% in quarter four. Over the year, almost half (43%) used BNPL at least once.
Despite increased scrutiny over BNPL services in 2022, Frollo said it remained a regularly used payment option for Australian consumers.
In the months that BNPL was used, Frollo data showed customers spent an average of $439 on the service, including repayments, fees and penalties. On average, users made 15 BNPL purchases per year, using 1.7 different providers, Frollo said.
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