How is big data driving the convergence of payments and lending?

By

Sara Elinson

EY Americas FinTech M&A Leader and EY Americas Payments M&A Leader, Ernst & Young Capital Advisors, LLC US Financial Technology Investment Banking, Senior Managing Director

FinTech strategist and ecosystem builder. Helping FinTech companies and incumbents advance digital financial services through investment, M&A and partnerships.

5 minute read 10 Dec 2018

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Coming out of the global financial crisis, we have witnessed a fundamental shift in the consumer’s relationship with credit.

Technology has transformed point of sale (POS) lending. POS loans are not new. They have been offered indirectly through department stores and health practitioners for years. But, the rise of digital technology has transformed the concept. In 2008, in a landmark deal, PayPal’s then-parent, eBay Inc., acquired Bill Me Later in a deal worth about US$900m. In the decade since, the trend toward POS lending is reshaping the consumer lending paradigm and driving greater sector convergence.

Two factors are contributing:

  1. The consumer relationship with credit has changed, partly in the aftermath of the global financial crisis and largely due to the rise of millennials. These buyers’ general distrust of credit and expectations of instant fulfillment have fueled demand for installment payments and other transparent borrowing options.
  2. Retailers face competitive pressure to drive top-line growth, with mega e-commerce retailers raising the bar for the online shopping experience. Merchants are embedding a seamless POS lending option to improve shopping cart conversion and the overall commerce experience. Besides Bill Me Later (rebranded as PayPal Credit in 2014), other POS lenders include Swedish-based Klarna, Affirm and Australia’s AfterPay. Models for these companies vary, but AfterPay works by taking the risk from the supplier, charging about 4% to merchants and collecting from end users who have linked a debit or credit card to the AfterPay account.

This space is evolving fast. US-based Bread Finance integrates more deeply into merchant websites — well before the paywall. For example, as a consumer browses, product prices are quoted at a nominal or financed monthly price, helping consumers envision different paths to purchasing.

Digital platforms broaden merchant financing options

As consumers access more financing options at purchase, payment providers offer different financing to merchants. Again, the rise of digital platforms and availability of big data analytics are major drivers, allowing lenders to make faster decisions and offer cheaper alternatives to the traditional merchant cash advance (MCA) — an advance against future debit or credit flows through the merchant account.

Merchant acquirers offer POS lending products to help customers solve a broader range of business needs — in this case, working capital financing. This also increases merchant lifetime values by introducing additional revenue streams — a valuable offset to compressing spreads experienced by acquirers in recent years.

In one example, Square launched Square Capital in 2014 to transition its MCA product to a “flexible loan product” through a partnership with Celtic Bank, a Utah-chartered industrial bank. Swift Financial, acquired by PayPal in 2017, provides short-term receivables-based financing services to business owners.

Data analytics is a catalyst for convergence

Big data algorithms in these new platforms enable greater convergence of lending and payments. When small business lending platform, Kabbage, announced its US$250m investment from Softbank in August 2017, the ability to enhance analytic tools using new data sets (i.e., POS transaction data) was cited as a key driver. More recently, Credibly, a small- to medium-business lender built on data science and analytic processes, is expanding outside its core business to acquisitions that provide a POS system with customer and payment data. Technology companies and alternative lenders like Kabbage tout their ability to analyze vast amounts of traditional and nontraditional data to make streamlined lending decisions: social, geographical and behavioral data about the small business borrower is within their platform’s reach. The prospect of adding data directly tied to the timing and magnitude of cash inflows represents a tantalizing new data lake for these lenders to exploit.

How will payments and lending converge further?

Where will this all shake out? On the consumer side, we believe POS lending will become more embedded in the online shopping experience. As behavioral browsing data is increasingly tied to shopping cart data — both abandoned and closed transactions — processors can help the merchant improve browser conversion and offer the right financing to optimize credit risk and propensity to buy. Like the rest of the retail experience, we expect this type of lending to migrate across the omnichannel shopping experience, particularly with increased penetration of SmartPOS devices.

On the commercial side, payment companies with a direct merchant channel are likely to dominate this space either by using their own balance sheet or partnering with alternative lenders. Payment companies with significant bank channels may lag behind for fear of competing with their bank partners. The allure of accessing entirely new data, and an opportunity to lower challenging customer acquisition costs, should also push alternative lenders deeper into the payments space.

This article originally appeared in our #payments newsletter – volume 20; author contribution from Sara Elinson.

Summary

Digital technology, the potential of big data analytics and the rising power of millennial buyers are driving the convergence of payment providers and lending companies — a phenomenon we’re seeing for both consumer and small business borrowers.

About this article

By

Sara Elinson

EY Americas FinTech M&A Leader and EY Americas Payments M&A Leader, Ernst & Young Capital Advisors, LLC US Financial Technology Investment Banking, Senior Managing Director

FinTech strategist and ecosystem builder. Helping FinTech companies and incumbents advance digital financial services through investment, M&A and partnerships.