In our last post, we discussed how fraud is impacting Buy Now, Pay Later (BNPL). Like with traditional finance companies, BNPL players must have a system in place to detect and prevent first-party fraud, third-party fraud, and synthetic identity fraud if they are to be successful in the long run. In addition, merchants, services providers, finance companies, banks, and credit unions offering BNPL must be able to balance credit risk with reputational and opportunity costs. In other words, BNPL players must shift their focus from maximizing originations to maximizing lifetime value.

Consumers want more flexible financing options and why BNPL is growing in popularity: according to one survey, now more than half of Americans have used a buy now, pay later service to finance a purchase. With majority of Americans having access to credit cards, this finding indicates that some consumers prefer financing a purchase through BNPL over a credit card. Yet more flexibility doesn’t necessarily translate to less credit risk: according to another survey, over a third of the respondents that have used BNPL reported that they’ve missed a payment and majority of those respondents also saw a subsequent decrease in their credit score. And late last year, Capital One, the 3rd largest credit card firm in the U.S., announced that it would ban customers from using their Capital One card to clear BNPL debt due to its “unacceptable risk.”

While BNPL is still unregulated in the U.S., calls from the FCA for full regulation in the U.K., means it’s only a matter of time before the CFPB steps in. Yet from a business viability standpoint alone, BNPL players should be adopting a more future-focused view of the consumer. And while determining lifetime value is a never finished process, the beauty is that when lifetime value is applied to routine activities like acquisition and collections, incremental gains will yield tremendous returns. Here are some ways to get started:

  1. Collections Management
    • Start payment communications early. Don’t wait until an account goes into collections. The more likely a customer stays in good standing, the more likely the customer will return.
    • Predict the future value of a cured account which includes the likelihood a customer would be a returning customer once in a good standing and create a communications strategy for high-value customers.
    • Leverage 3rd-party data to beef up your predictive models.
  2. Customer Acquisition
    • Leverage 3rd-party data for identity verification. This is especially important if your application collects minimal PII.
    • Leverage 3rd-party data for fraud detection.
    • Leverage 3rd-party data for thin file and no file credit risk scoring. Even if your value proposition includes “no credit check,” there are a myriad of alternative credit data sources that can be used to assess creditworthiness.

However, the know-how and infrastructure necessary to gain a more holistic view of consumers and improve your acquisition and collections activities in a regulatory-compliant manner may be outside your organization’s reach. This is where Enova Decisions can help.

Continue to Part 4: Fast is Not the Same as Flexible

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