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Your car catches a flat tyre the same week that you get a vet bill. You need to pay the deposit on a rental property as well as covering the cost of moving. The winter gas and electric bills arrive within days of one another.
These are the kinds of day-to-day financial emergencies that most people who aren’t members of the one percent are all too familiar with. Until recently, the way most people dealt with them was either to beg a deferral from the biller where possible and incur a hefty charge for doing so, or to cover them with a credit card.
Out with the old
This practice, where banks extended credit to customers with limits in the thousands or even tens of thousands of dollars, has been a financial mainstay since the 1970s. It is fundamentally broken.
The risk profile of unsecured lending means that interest charges are high, and while some consumers may have the discipline to save cards for an emergency, people are walking around with a standing invitation to spend thousands of dollars on anything they would like, whenever they would like. This is not a recipe for financial health.
Some people are forced to turn to predatory payday lenders who charge exorbitant interest rates, gouge horrific late fees and trap people in a cycle of debt and desperation. These fly-by-night operators are a blight on our society and should be put out of business as soon as possible.
People facing urgent but small emergencies should not be faced with having to effectively borrow thousands of dollars in the form of a credit card. Big banks have been using this broken system to take advantage of people for far too long.
In with the new
And that’s partly why buy-now, pay-later has been so popular. It’s not that people couldn’t use credit cards to pay for their purchases – it’s that they didn’t want to. When fintech innovators offered a better way to purchase than the one provided by the banks, people adopted it in their hundreds of thousands.
This is part of the reason that I founded Beforepay. I saw that the options that were out there for people encountering the kind of everyday emergencies we are all familiar with were not fit for purpose. I saw that in a world where we can get everything on demand – from movies to music to food delivery – pay cheques and salaries were still stuck in the past.
This has forced banks to change their behaviour. They’ve responded by offering a better deal. NAB has launched a credit card with flat fees – no interest.
The same is happening now for pay on demand. When these services first launched, the model was attacked by those wanting to stick with the status quo – the credit cards and shady payday lenders.
Now the tide has turned here too, as banks realise they have to adapt to what people want. Commonwealth recently launched its own pay on demand service. While this still lags behind the fintech leaders in the category by charging interest as well as fees, it recognises that people would rather pay a single one-time fee to access money they’ve already earned than saddle themselves with high interest rates and unsustainable credit limits to manage their day-to-day finances.
As financial technology continues to develop, we will see even more advancements that bring people fintech products that let them spend, save and budget on their own terms. Companies like ours are already integrating AI, data analytics and predictive modelling to give people smart tools to manage their budgets and introduce new regimes of financial wellness and literacy.
With the advent of open banking, where consumers are in charge of their own financial data and how it is used, this is only going to accelerate. The era of large banks controlling how people access and spend their money, and charging them handsomely for doing so, is over.
Competition and technology are driving seismic changes in the financial landscape. The banks are smart and will adapt to this new environment – they have to, or they will lose their customers. Regulators will see the advantages in this increased customer focus and set the rules accordingly. Consumers will become even more attuned to how to use the tools technology has given us to manage their budgets.
In the financial future, it’s the people, rather than the banks and credit card companies, who will be in charge of their money.