Jan 27, 2022

The importance of alternative credit in BNPL

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Commerce has changed in the past 20 years, taking new forms which were previously unthinkable. Not only did commerce transition from physical stores to online stores, but new forms of payment have emerged, such as the now-famous Buy Now Pay Later (BNPL).

BNPL offers consumers the possibility to finance their purchases by paying fixed monthly amounts generally without interest, and BNPL providers, in turn, charge merchants a fee for each sale. In other words, the most significant difference between a credit card and BNPL is that the person doesn't necessarily have to be banked to receive financing. In addition, it is not the client who assumes the costs for the deferral of payment but the retailer.

Lately, BNPL has grown rapidly, especially during the pandemic, where social distancing and the economic crisis enhanced the search for new forms of financing and contactless transactions. According to Forbes, BNPL will reach 100 billion US sales by the end of 2021.

Some of the top benefits of BNPL include:

  • Financing: customers can buy the product without having the actual funds available at that time.

  • Decrease in the number of shopping cart abandonments: being able to pay later decreases the regret rate or the problems that can be generated at the time of the transaction.

  • Greater knowledge of customers: you can obtain real-time data from users and know their solvency degree. 

  • Loyalty: users feel more comfortable with the shopping experience when finding an additional payment option.

Although BNPL has numerous benefits, it is essential that Buy Now Pay Later companies are clear about their customers' profiles since the risk of not collecting payments could be large. Due to this, many companies are now using alternative data as the fundamental basis of the business.

Alternative data is a set of information that comes from multiple sources beyond the ones offered by a traditional credit bureau. For example, artificial intelligence algorithms are analysed to obtain a credit score with the finality to understand customer behaviour and reduce the potential risk of debt default.

Some alternative credit providers, such as credolab, study the solvency of companies by instantly analysing the information generated when the person is browsing on their smartphones. This allows in-depth client knowledge and establishes predictions about their behaviour to separate real risks from fake ones.

Alternative credit allows companies to expand their client portfolio without incurring greater risks. For example, it will enable you to reach unbanked but solvent people who need new forms of financing that go beyond a credit card. Likewise, it improves the customer experience since the analysis is carried out in real-time, without the person needing to wait for an approval time.

The trend towards the democratisation of consumption is a fact. Increasingly, new technologies seek to meet their prospects to offer them products according to their budgets and needs. The new credit scores based on alternative data align with BNPL, helping companies understand their client's creditworthiness and predict their future behaviours.

Learn more about the relationship between BNPL and alternative credit here.