Former Director, Affirm
This executive has over 15 years in the consumer credit space and currently actively consults for corporates on buy-now-pay-later. She spent two years at Affirm as director of enterprise client success and has thought deeply about the evolution of BNPL from the perspective of large merchants.Read moreView Profile Page
Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.
What is the value proposition to the consumer of using a split pay, buy now pay later provider like Afterpay in a world in which instalment-based plans are also available on credit cards and lots of other payment mechanisms? What’s going to drive the consumer to use Afterpay if you can also do the same thing with a Mastercard or Visa?
I think it comes down to a few things. First of all, it is the experience. The way that Afterpay is merchandised on site, whether it's on the product page or the checkout, it basically shows the dollar amount that you would pay so they have that real estate. You basically apply and buy right within the experience and so it's just super seamless. That in and of itself, in terms of where it's merchandised or shown, is a huge differentiator because one, it's easy and two, they really trust what a brand is offering them. If it is merchandised on site, they are likely to trust it if they have high brand affinity.
Today, we also talk about approval rate so with a split pay, buy now pay later option, I think they're saying that it's about a 90% approval rate and so that is very high. When you look at a credit card, you have to get approved for the credit card first and so that's one hurdle. Then secondly, when we look at the experience, you have to go and identify which plan you want to pay over time with post-purchase, so that's extra customer effort. While it's definitely possible and I'm sure we’ll have a nice uptake, that would be the differentiation between the two products.
Then lastly, I would say brand. We are finding that the newer generation is more likely to bank with a startup or a tech company than a traditional bank and so I think that is also something where if it's new and it's branded similar to their lifestyle and it's fun, then it is something that factors into that decision point.
At the product level today, you don’t see a checkout option to pay with your credit card, but the nature of buy now pay later means that option can be at the product level. The attraction from the consumer is that it’s displayed; they’re more aware of it as an option. Then at checkout it’s the last piece of work because you’ve added the product to your cart with the decision up front on what your payment plan’s going to be, as opposed to checking out and saying to Mastercard or Visa, this is the play I want. Is that a fair summary of what you’re saying?
Yes. Even at checkout it's four fields of information that you're asking for if you're being underwritten for the first time. If you have used that payment type before, you enter your phone number or your email address, that's auto populated and you move through the process that way so it's very simple. Whereas with a credit card, first you have to go through an application process – it can be up to 16 fields – and often you have to wait to receive the card in the mail. Then when you receive the card, you pay with a credit card and enter the information. That's probably auto-saved too at this point but then, separately, you would need to select the plan post-purchase. Those factors taken together, over time, can make a big difference in terms of conversion rate for the merchant.
You talked a bit about the approval rate and how high it is. That would, of course, be relevant to subprime borrowers or people who would struggle to get credit. If you were to segment the user base into those where it’s an experience choice versus another group who are unable to access traditional credit means, how would you separate those two groups? Is the value prop really about those who can’t use or access traditional credit or are you saying the experience is that powerful, even for people who have full access to traditional credit?
I think first and foremost it's about the experience. Something is merchandised on site, you're breaking it down in the form of a biweekly payment and it just automatically looks more attractive. Then if you're also offering it at a 0% APR, even somebody who has a very rich rewards program, you know that's a very attractive offer and that will make you potentially tend to switch. On the backend, you can also pay with that really rich rewards program as well. It’s kind of a double dip.
What we're seeing is that it's not necessarily a subprime product. It is appealing to all and then we're seeing is the credit quality really depends on who the merchants' customers are. If I have a high credit quality, high-end type of product and brand, those are generally the type of customers that you will bring in and if I have kind of a more mass brand, I generally bring in lower credit quality. We're seeing that play out.
Additionally, when you look at the underwriting criteria for these BNPL providers, it's not necessarily that they are turning into a subprime product. What they're looking at is alternative data. If I'm a younger customer, I'm more likely to get declined for traditional credit because I haven't built my credit history, but if I am leveraging a buy now pay later product, we're looking at alternative data to be able to underwrite somebody on the margin. Some of that is just ingesting additional data fields to make better decisions.
Secondly, I would say part of it is also based on the payment type itself. These buy now pay later products work more like instalment loans where you have less loss exposure; you can approve somebody for a $1,500 purchase and that's really the biggest loss you would take. If you're approving somebody for a credit card and you're looking to extend them a $500, $2,000, $3,000 credit line, you're naturally going to have a higher propensity for stricter criteria because your losses might be higher.
On that note it seems like BNPL is dynamic credit allocation towards the customer so it’s made in real time as they apply to pay for instalment?
Yes. You are assessed each time, not necessarily underwritten for the split pay.
And the assessment is based on your history with that BNPL provider? As long as you’re up on your payments, you’ll get approved for another incremental loan?
Yes. They still look take into effect the broader factors that you would definitely pull, but yes, when you look at credit performance through that specific provider, they have more data to make better decisions.
You’d said earlier that one of the advantages is there’s only four questions to fill in as opposed to traditional credit of 16 or more. Of course, traditional providers could limit it to four to make the UI better but they don’t because they think those question are important for underwriting. There’s a tradeoff between ease of credit approval versus doing good credit underwriting. Is there a reason to think that a buy now pay later provider can underwrite at the same quality level using less questions?
The way that I look at it is that it's not necessarily the quality of underwriting; it’s how you get the data. With the buy now pay later providers, they're ingesting those four fields, but they can get the additional data from additional sources so they don't need to get it from the customer. They can look at a broader set of inputs, such as their credit card information and, essentially, extract that unstructured data into their models. The credit card companies and the banks can do that too and, quite frankly, I think what's holding them back is their data architecture; their ability to set up systems to take unstructured data from elsewhere to get the information that they're currently asking from their customers.
An example would be Synchrony Bank. They used to have a 16-field credit card application but somebody could have a Lowe's credit card, a Gap credit card and an auto financing credit card and each time someone applied they would have to input their full information. They rearchitected their data structure and now they have that 360 view of a customer to understand what they have in the underwriting. If you’re a known customer, they’re not asking for 16 fields anymore because they're able to extract that data internally.
For me, it's not necessarily quality of underwriting. It's more where you're getting that information from to then begin that decision process.