Why is the business press fawning over a payday lender?

As tech-related stocks continue to bubble merrily away, it’s not only valuations that have become unhinged from reality.

Just like the great tech bubble of 1999, founders are using the veneer of technology to try to convince speculators and journalists that their dubious business model is worthy of a revenue multiple.

Last week a company called Beforepay raised $4.2 million from investors including former Vocus boss James Spenceley and young rich lister and Finder co-founder Fred Schebesta. This week the AFR‘s Street Talk reported that the company was considering a pre-IPO raise of $10 million.

The business press, including Crikey’s sister publication Smart Company, fawned over the new start-up, perhaps because Beforepay sounds so much like the $25 billion Afterpay and maybe because Beforepay’s founder Tarek Ayoub wears cool, clear-rimmed glasses.

It appears, though, that no one bothered to spend much time looking at what Beforepay actually does.

While it has almost nothing in common with buy now pay later (BNPL) businesses like Afterpay, that didn’t stop Ayoub creating a narrative tying it in — noting that Beforepay’s customers “use us for everything else that BNPL does not offer” and dubbing the business “pay on demand, as opposed to another BNPL offering”.

Ayoub also told the AFR: “Afterpay and the other buy-now, pay-laters are only integrated with about 13% of the merchants out there. So I thought I could create a different way for consumers to access credit.”

While Beforepay seems to be leveraging off Afterpay’s name, it is very clearly a payday lending business, which is not new at all. This despicable industry (which is completely legal in Australia and is undertaken by businesses like Cash Converters and Wallet Wizard) lends small amounts of money to (usually desperate) borrowers and automatically garnishees payment from their next pay cheque.

Beforepay was called Cheq before the founders seemed to realise they could raise a lot more money by changing the name to something that sounds like Afterpay.

There’s a reason why payday lenders are among the world’s most hated businesses: they target the desperate and charge usury fees. Federal Labor MP Milton Dick targeted payday lenders in February, accusing them of being predatory and unscrupulous.

Beforepay, whose terms and conditions still refer to its old business name Cheq, charges users a flat 5%. While this is significantly less than lenders like the odious Cash Converters (which charges a 20% establishment fee and 4% fees on small personal loans), it isn’t cheap given the short time frame for repayment.

The level of effective interest charged depends on when the borrower’s next pay date is (and how often they’re paid). But someone paid monthly can delay repayment by one pay cycle, so the average borrow time is likely to be about one month. That’s an effective annualised interest rate of just under 80%.

If you repay the debt sooner, the rate is far higher, albeit less than traditional payday lenders who charge fees and interest.

Beforepay effectively cuts off borrowers if they don’t repay their debt, which can force them into a longer cycle of doom by imposing even higher-interest products to pay off the earlier high-cost product.

When an app-based payday lender using largely outsourced technology suddenly becomes a hot fintech, and gets fawning articles in our leading financial newspaper, it’s time to start dusting off the bell.