Buy Now, Pay Later FinTechs: Gifting Greater Financial Health

Buy Now, Pay Later FinTechs are Well-Positioned to Drive Holiday Sales in 2020

Buy now, pay later FinTechs are well-positioned to enable a growing portion of consumer spending, especially during Black Friday and Cyber Monday. Consumers who are new to credit are adopting buy now, pay later services en masse. And after raising substantial lending capital in 2020, buy now, pay later FinTechs can give consumers the gift of greater financial health this holiday season.

Cyber Monday sales achieved a record $9.4 billion in 2019 vs. $7.9 billion in 2018, which eclipsed Black Friday sales of $7.4 billion and $6.2 billion over the same period, respectively. That has prompted some retailers to kick off sales as early as October in an effort to drive incremental sales volume leading into the holiday season. However, there are several headwinds brought about by the pandemic - macroeconomic challenges, higher unemployment rates, and negative supply and demand shocks. So it will be interesting to observe how buy now, pay later FinTechs help buoy sales for eCommerce merchants, especially as consumers shift from off-line to online shopping.

Pessimism aside, buy now, pay later FinTechs fared well in 2020. Top players raised substantial capital to respond to growing consumer demand. Meanwhile, other FinTech lenders pulled back on originations and even reduced employees to preserve operating capital. Additionally, case studies show improved customer conversion rates and higher average order values for merchants offering installment payment options. In fact, some merchants are seeing a 20% lift in conversion rates and a 60% lift in average order values. These are encouraging statistics given the pessimistic outlook for 2020 retail sales.

However, Most Consumer Credit Scores Won't Capture This Holiday Purchase Financing Repayment Behavior

Very few buy now, pay later FinTechs report customer repayment behavior to the national credit reporting agencies. As a result, there is a gap in the lending ecosystem’s ability to discern true outstanding consumer debt. Most consumers who use buy now, pay later services won't see a direct benefit. Their credit reports and credit scores won't reflect repayment of these obligations as agreed. In some cases, those consumers who use existing credit cards to repay buy now, pay later installment payments over time versus using their credit card to pay for the goods in full may benefit indirectly from lower credit card utilization, which can represent up to 30% of a credit score’s calculation. But even this indirect benefit will largely disappear as buy now, pay later FinTechs switch from allowing credit card payments to accepting payment via ACH debit, in favor of better unit economics.

In parallel, those consumers who fail to make payments on time will not have their consumer credit reports or scores updated. This further degrades credit transparency.

U.S. consumers hold at least 2.7 credit cards on average, with some holding as many as five credit cards. We can extrapolate this behavior to buy now, pay later services, where consumers are likely to establish accounts with multiple firms to increase their financing options.

Additionally, retailers are establishing partnerships with multiple buy now, pay later FinTechs. They want to ensure their customers have multiple options to finance purchases at the point-of-sale. Their hope is to increase conversions and average order values. This dynamic may influence the number of buy now, pay later services that consumers leverage on average as well.

The Gift of Improved Financial Health and Greater Transparency to the Lending Ecosystem

Historically, FinTech lenders prioritized customer repayment performance reporting as a “day 2 activity.” That means the reporting capability is established only after the FinTech lender has operationalized and scaled its new account origination and onboarding processes. Buy now, pay later Fintech startups are following the same approach.

Moreover, we observe a greater focus on consumer empowerment. Consider the growing trend of new data furnishers that are reporting broader consumer payments, such as rental payments, to Equifax. Coupled with alternative data, such as subscription services, utility, telecom and bank transaction activity, lenders are gaining a refined view of the consumer’s financial picture. All told, this trend enables consumers who might have otherwise been overlooked for traditional forms of credit to be eligible for financing at fair rates.

Most Gen Z consumers are coming of age and are likely new to credit, and Millennial and Gen Z consumers prefer buy now, pay later services over traditional forms of credit. This consumer segment would benefit substantially from having their repayment performance reported to national credit reporting agencies, such as Equifax.

The Benefits of Reporting Repayment Performance

Some leading buy now, pay later FinTechs recognize that reporting customer repayment behavior enables:

• Mission Alignment
  Payment performance reporting aligns with the customer-first mission of most buy now, pay later FinTechs. They want to help improve the financial health of younger customers. As a result, they can avail of traditional credit products as they age.
   
• Product Differentiation
  First-movers can differentiate their buy now, pay later product offering by enabling payment performance reporting. This enhances their value proposition to customers in an increasingly crowded market. And this translates to increased customer lifetime value.
   
• Lending Ecosystem Contribution
  Most buy now, pay later FinTechs leverage soft credit checks to determine how consumers performed on other credit obligations. Some are paying it forward by informing the broader lending ecosystem about new buy now, pay later debt obligations. This enables other lenders to accurately calculate debt-to-income and payment-to-income ratios. Additionally, it helps them determine if the customer is repaying the buy now, pay later obligation as agreed.

Equifax supports buy now, pay later FinTechs by discussing industry best practices and leveraging our industry knowledge. We aim to identify the best approach to achieve their customer-first mission, while providing transparency to the credit ecosystem.

Please visit http://equifax.com/startahead for more information and to learn how Equifax is supporting the FinTech marketplace. https://equifax.com/startahead Stay tuned for more coverage of the buy now, pay later space.