4 reasons why online lenders are innovating with purchasing cards
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Having worked with or for online lenders for the better part of a decade, I know firsthand how difficult it is to stay competitive in an ever-growing market. The cost of funds remains high for high-end lenders and margins are getting thinner by the day. Yet consumers and small business borrowers are demanding faster underwriting and faster funding, and investors continue to demand record quarterly lending volume.
How do online lenders keep their heads above water? They become creative.
In recent years, Kabbage and others have stepped up to introduce a purchase card product to their borrowers, and with their early success, many lenders are now following suit for the following four reasons:
1. Stay on top of the customer’s mind
Point-of-sale lenders (lenders who offer a loan at the store checkout) are beginning to look for new ways to reach the consumer directly and in more than one place. It naturally follows that several lenders are working to roll out a card product for this very reason.
In the area of small business lending, Kabbage decided to offer a true card product for its borrowers to receive loan installments, not only putting the business in the mind of a customer, but literally in his wallet. As borrowers began to consider Kabbage as their loan source for making purchases, they turned to the brand more often for their financing needs. In fact, usage has increased markedly among borrowers who have opted to receive a card.
Related: How a Young Entrepreneur Built a Credit Card Processing Empire at 16
2. Speak the language of the company’s major partner targets
For point-of-sale lenders, the key is to find and retain as many retailers as possible to serve as sellers to the lender. While many lenders start with local retailers in their backyard, most aspire to land a big box retail account like GreenSky Secured Home Depot and Affirm Secured Experian. This is a game-changer for an online lender in terms of revenue, but comes with complicated requirements from the retailer.
Large retailers are unaccustomed to receiving funds from a lender through the Automated Clearing House (ACH), the primary method of transferring money between lenders, borrowers and merchants. These retailers require all partners to have the ability to pay them in real time and through the same credit card “rails” or payment method as they receive all other funds.
“Lenders are looking for ways to improve their bottom line while improving their borrowers’ experience,” says Omri Dahan, chief revenue officer at Marqeta, a card processor for online lenders that announced a partnership with Visa this week. last. “Whether it’s a small business or a point-of-sale lender, a Marqeta payment card serves both purposes. We continue to focus on online lending to give our customers the tools they need to stay ahead of the market.”
The introduction of a card product – whether plastic, virtual or via digital wallets – allows the lender to send loan funds in real time for goods or services, as if the purchase had done with any other card and without the full integration work with the retailer’s point-of-sale infrastructure.
Related: The Basics of Using Credit Cards to Fund Your New Business
3. Guarantee of use of funds
When lenders make a loan, they are often very limited in how the loan proceeds are spent. Even with technology integrations with the borrower’s bank account, the lender can only see the cash inflows and outflows from that bank account, but even that data cannot be directly tied to the loan funds that have been distributed. . It is therefore difficult to ensure that the loan funds are used for the intended purpose.
For small business lenders, utilization of funds is a very important data point in the underwriting process. Providing a loan for inventory, for example, is much lower risk than providing financing for marketing because inventory can be sold, if needed, and exchanged for value to the lender. Therefore, many lenders are unwilling to provide financing for certain uses. Unfortunately, many borrowers have learned this by applying for several loans and are sometimes even tricked by brokers into lying about the use of the funds, knowing that the lender is no wiser.
“Kabbage as a business couldn’t have existed ten years ago because we didn’t have access to the real-time data that we use to help our clients access capital,” explained COO Kathryn Petralia. “By using the APIs our customers share with us to run their business, from data processing to verifying account data, we can make quick decisions to deliver our line of credit product.”
Small business lenders have now started using card products to understand the exact expenses related to their loan. This helps the lender determine if the borrower has an accurate risk profile for future lending, and does so in a way that the borrower cannot “fix the numbers”.
Related: Five ways to increase business credit
4. Revenue Sharing
Ultimately, online lenders are looking for the most attractive way to smooth their income growth curve, but cannot do so at the expense of their borrower. This prevents the lender from gaining traction without finding lower cost financing or finding more customers (either through new products or new methods of customer acquisition).
Cards are quickly entering lenders’ business plans because of the new revenue stream they generate for the lender. By offering a card to borrowers, lenders can now share exchanges. This can generate additional revenue for the lender, and in a game where every basis point counts, he is careful.
With the crowded and murky competitive landscape of online lending, coupled with the need for lenders to scale rapidly, innovations in delivery methods are gaining momentum. Payment cards are now part of the solution.