A Fintech’s Guide to Consumer and Small Business Lending
The lending space – traditionally dominated by banks and credit card companies – has seen a shift in the last year. The emergence of fintechs, quick to launch and adapting to consumer demands, have stepped to the forefront of innovation and lending.
While traditional products like credit cards have long been the standout lending product, consumers, particularly those in the 25-45 age bracket who lived through the 2008 crash, have voiced concerns over high-interest and debt products. As a response, fintechs have started building solutions that adapt to these growing concerns and provide alternative lending options.
Whether a consumer, small business, or startup, the consensus has been clear, that these new innovative solutions are beginning to address their needs. But, as a lender, it’s crucial to not only address concerns, but make lending more accessible and seamlessly integrated into the payment/lending experience.
Our “Fintech’s Guide to Consumer and Small Business Lending” takes a look at several types of lending leading the charge, and how as lenders you can best execute these solutions seamlessly for a smooth end-to-end user experience from application through to repayment.
Addressing Cart Abandonment with Buy Now Pay Later Models
If you’re a lender focused on POS financing, you’re likely familiar with the Buy Now Pay Later model. Buy Now Pay Later (BNPL) helps consumers manage financial strain and provides more immediate access to bigger ticket items by cutting the cost into installments. Where they otherwise would have potentially abandoned their cart – approx $34 B worth of merchandise was abandoned in carts in 2018 – BNPL allows them to purchase the items they need or want and budget installments or repayments until the full cost is paid off helping them manage cash flow.
BNPL is the ideal POS financing option for consumers looking to avoid costly interest rates and late payment fees akin to credit cards. And for retailers, partnering with BNPL fintech lenders opens bigger ticket items up to a larger customer base, thereby increasing sales.
Integrating BNPL into Your Customer Journey
With companies like Afterpay estimating financing volumes of upwards of $160 MM in sales from Black Friday and Cyber Monday alone, it is clear that BNPL is making inroads in the retail and travel sectors.
But it’s more than simply adding a BNPL option at checkout. One of the key elements surrounding integrating BNPL goes beyond just the front-end awareness and engagement of getting a consumer to make a purchase. For Buy Now Pay Later companies and fintechs offering POS financing, their journey needs to seamlessly integrate into a brands’. This may mean that post-application acceptance, financing is sent directly to the merchant guaranteeing the sale while the consumer pays in installments, or financing is sent to the consumer to facilitate the payment in full and then they pay installments to the financier.
Seamless End-to-End Buy Now Pay Later Payment Experiences
With the direct to merchant financing, payments are traditionally sent via EFT/ACH or wire which often still takes until end-of-day for reconciliation. However, with the demand for real time transparency and messaging, fintech lenders can now issue real time payments or virtual cards for the exact purchase amount to a merchant to cover the cost of the BNPL purchase.
Similar to direct-to-merchant financing options, many POS lenders see value in giving consumers the flexibility of choice when making a purchase and may choose to approve applications for general purchases needs, issue a merchant category code-restricted virtual card, and allow consumers to choose the best option – often seen with BNPL travel where lenders give consumers an option to find the best bang for their buck.
Innovative Offerings of Traditional Lines of Credit
Customary of small businesses and in particular, startups, lenders often find simplified cash flow management, unexpected costs and business setup (like equipment, vendors, suppliers and more), the most likely cause of loan applications. Having access to financing is key in order to run a successful operation, especially when you’re starting out. But as lenders, how can you issue loans and guarantee they go towards the aforementioned or agreed upon needs?
While line of credit loans (or LOC) are the usual solution to these startup and small business needs, lenders are looking at ways to better regulate LOC funds and help startups succeed. Whether it’s to cover the cost of seasonal ebbs and flows, or provide cushion with cash flow management, invoice payments and more, LOCs are often not designed to validate and authorize purchases against loan agreements. However, fintech lenders have begun innovating ways to better structure LOC loans with MCC restrictions or secondary authorization.
How to Validate Purchases Against LOC Agreements
As mentioned above, LOC lenders are beginning to look for ways to better regulate and validate funds issued against agreed upon terms of a loan agreement. This has led lenders to turn to prepaid cards as a method of loan disbursements as they can be equipped with Merchant Category Code (MCC) restrictions and secondary authorization.
But how do these validation methods work when paired with prepaid cards? Because they are a line of credit loan, prepaid cards can be set up in two different ways. Firstly, for MCC restricted cards, the loan can be pre-loaded to the card with restrictions in place that limit the card usage and spending to agreed upon merchant categories like specific types of contractors, delivery services, retail/equipment, dining, appliances marketing and more. This ensures that funds are only spent at merchant types that were listed as a part of the line of credit agreement but still gives the lendee control over the spending.
The second way to setup a prepaid card LOC, is with secondary authorization, where the loan acts as credit and at the point-of-sale of the purchase, lenders can authorize or decline the purchase based on agreement parameters or funds available. Both are prepaid card options, provide lenders with a greater deal of control over the spend of funds as well as provides the lendee with a cash flow management tool and backup funds for unexpected costs.
Reducing Risk and Issuing PayDay Loans in Real Time
PayDay loans, also known as payday advances, salary loans or cash advances, are typically unsecured loans with the lender often providing cash loans upon approval for small lump sums of up to $15K. While cash is one of the few real time payment methods of the old, it opens up high risk for lenders who are required to keep large sums readily on hand for disbursement.
One way PayDay lenders are looking to reduce fraud and increase customer experience is with instantly issued physical or virtual prepaid cards. These cards can be kept in-house unloaded, and unactivated. Upon approval of an application, funds can then be loaded in real-time to the card and issued to consumer thereby eliminating the need for cash on hand. With PayDay lenders still a big player in the small, unsecured loans space, innovating and improving upon the already existing structure further benefits those in need while reducing risk for lenders.
Integrating Seamless Debt Repayment Processes
As a part of the end-to-end lending experience, a key proponent is not merely the disbursement or issuance of the loan, but also the repayment of the loan. Whether collecting in one lump sum or in installments, seamless integration into the existing payments system is crucial for a fintech’s success in the lending space. Consumers and businesses alike are making the demand for simple solutions known, so the more all-encompassing your lending solution is, the more likely it is to be adopted.
However, debt repayment processes are not always a simple integration in the back-end, and may require some 3rd party integrations. That said, a great innovation for fintechs is the emergence of many whitelabel solutions and services, that provide fintech lenders access to integrate into their APIs and provide the end-to-end user experience without having to build proprietary technology. And when it comes to debt repayment, adding it to the application and setup process leaves you ready to not only disburse loans and funds, but collect later down the road.