Why should BNPL players use Open Banking-based credit scoring NOW?
BNPL (Buy Now Pay Later) is booming. Merchants love it because they can get more customers and increase their average order size. Consumers love it because they get interest-free payment plans as they shop online.
Open Banking increases acceptance rate
Open Banking is unquestionably very efficient for credit risk assessment. Its adoption is high and keeps growing all over the world, and in the near future, the use of Open Banking will be as common as credit/debit card payments on the Internet. That being said, this is not yet the case, which leads some BNPL players to think that implementing Open Banking might decrease conversion rate. However, leveraging Open Banking the right way can increase the conversion rate as well as the average basket, and here is why:
👉 Every BNPL player rejects some consumers mostly based on criteria like shipping address, order amount, credit card type or absence of an order history. Among these customers, many are obviously creditworthy. Instead of rejecting these customers, Open Banking is the perfect way to assess their affordability and to convert them, thereby increasing the merchant’s and the BNPL player’s revenues.
👉 BNPL players have very little information to allocate the most appropriate spending limit for each customer: setting it too high means the customer might become over indebted, setting it too low means sales opportunities might be missed. BNPL players usually set a low initial spending limit that their customers can use, and as customers pay back their installments, this limit is increased gradually as long as there are no late payments. Open Banking is the best way to set the most appropriate spending limit from day one. It allows both the BNPL player and the merchant to increase acceptance rate and revenues while making sure the end customer is creditworthy.
Open Banking increases profitability
At the beginning of the BNPL wave, loan default was very low. As more and more people use BNPL, the default rate will increase significantly. It’s already the case as many players are seeing a spike in loan losses quarter after quarter. Consequently, credit risk management has become a serious topic.
BNPL players should start now caring about credit risk mitigation, and here are 3 simple ways to get started with Open Banking:
👉 Propose an Open Banking journey to customers who use BNPL to finance a high average basket size (e.g., average basket size > 500 €). By doing so, the BNPL player can better assess affordability upfront, mitigate credit risk and prevent significant loan losses.
👉 Many BNPL players offer their own mobile app where end-customers can manage their ongoing BNPL plans. End-customers can also (in some cases) shop directly from the BNPL mobile app. Adding Open Banking account aggregation within the app is an easy step that every BNPL player can take. The experience for the end user is frictionless as credit scoring can happen in the background whenever they pay their purchases using BNPL at checkout.
Open Banking is the solution for the upcoming regulation
BNPL is undeniably convenient, easy to use, and cheaper than using credit cards. However, many consumers can quickly get caught up in accumulating debt and interest driving them to over-indebtedness. This led regulators all over the world (USA, UK, EU, etc.) to become increasingly concerned about how easy it is for consumers to buy more than they can afford using BNPL and potentially build up sizable debts. These regulators will undoubtedly take actions in the coming months to bring some regulation to their market to ensure BNPL players assess their customers’ affordability and creditworthiness.
BNPL players should act now, anticipate the regulation, and show the world they are responsible. Here are a few options to do so:
👉 Let’s assume there is a fraction of consumers who are not willing to use Open Banking, BNPL players can still propose Open Banking as an optional way for customers who want to share their bank transaction history to check their creditworthiness, and make sure they can afford the BNPL financing plan. Proposing this option to the customer is undoubtedly a good way to make an additional step toward responsible BNPL.
👉 Open Banking also enables an efficient way to monitor the reimbursement of the BNPL plan, and instead of acting reactively when a customer is late for a payment, BNPL players can act proactively (as they have access to bank transaction data during several months after origination with the consent of the consumer) by detecting late payments and automatically proposing a new suitable reimbursement plan that can help customers avoid late fees while protecting them from over-indebtedness.
👉 Another benefit of using Open Banking is to allow BNPL players to avoid BNPL/loan stacking, which is the fact that a consumer is taking several BNPL financing plans at the same time or within a short period of time, which can drive many people to over-indebtedness.
Answering these needs and as part of our ambition for fairer, more responsible credit, it is vital to provide BNPL organisations and financial institutions with a simpler means of embedding a Credit Scoring solution into their checkout process. That’s why Algoan has launched a few days ago a self-service API allowing each business to do it.
Let’s fully unleash the power of Open Banking data!