Who uses Fintech products: evidence from the pay-on-demand market

Abstract

This thesis examines a novel Fintech lending product in Australia named pay-ondemand. This product claims to let its users access their wages in advance, at a flat “5% transaction fee” without any hidden cost. Using the transaction data of customers at a major Australian bank, I have found that, on average, pay-on-demand users are usually more financially constrained compared to the general public. They tend to live in poorer socioeconomic regions, earn lower incomes, have less savings, and lack alternative access to credit due to past delinquency records and damaged credit reputation. The product is predominantly accessed by younger males. Almost half of the users are additionally paying an unpaid payment fee, which is a cost imposed by the banks due to a failed direct debit request and represents a hidden cost of using pay-on-demand. An average user of pay-on-demand will be charged unpaid payment fees 2.24 times a month, which given the average loan size of $250.73, increased the Effective Annual Rate by 54%. On average, users who are from poorer socioeconomic region, have less saving balance, earn lower wages, have high credit risks, and are in hardship are more likely to pay an unpaid payment fee. Finally, I found that users with lower savings balance use pay-on-demand more frequently, although they borrow less in total because they are deemed riskier by pay-ondemand lenders. These users paid more unpaid payment fees, which worsened their financial status and forced them to borrow more from pay-on-demand to guard against future cash flow mismatches. Overall, the results highlight the importance of a strict underwriting procedure. Payon- demand is excluded from the responsible lending criteria, so lenders do not perform a credit check. If a credit check is performed, constrained borrowers would be better off, because they could save on unpaid payment fees and their financial resilience would improve.