The ability to offer real-time retail installment loans at the point of sale has been a hot topic for some time, with fintech startups grabbing most of the headlines. Banks and retailers, however, remain the ones with the deepest understanding of their customers, and large retailers in particular have the internal capabilities and financial leverage to capitalize on this customer need without complicating the process by involving additional third party lending. Let’s explore how automation can help optimize point of sale lending for improved financial performance and client satisfaction.More Variables, Fewer Problems
First off, let’s review the basic objectives and constraints to retail lending. Holding loss rates in check is obviously critical; however, risk-based pricing can help to accommodate lower-credit customers and if executed properly, serve as a catalyst for closing additional business. For retailers operating their own financing arms, the resulting loan portfolio can be a profit center in its own right.
One of ARGO’s clients, a national firm with nearly 200 retail outlets and a focus on large ticket items, was looking to improve its real-time decisioning of loan applications. This client was already engaged in point of sale lending, but wanted to further leverage retail lending technology to automate underwriting, enhance its risk-based pricing and establish the ability to scale its business to double or even triple current volume.
One of its key breakthroughs was the addition of 35 new attributes to its scorecard models, bringing the total to 371 unique variables. The enhanced process allows decisions to be made even more quickly, with minimal back office support. Best of all, the firm reduced its bad debt losses while simultaneously improving its close rate. Of course, this type of expanded analysis is only possible through the leveraging of robust retail lending technology solutions.
An Easier- and Safer- Shopping Experience
It isn’t a one-way street, either. One of the factors driving additional loan volume is the enhanced value enjoyed by customers as well. Not only do applicants receive quicker turnaround of decisions, a finance-based shopping tool provides the ability to narrow their options to units meeting their budget- further sorted by those already in stock versus special orders.
Shoppers are now also able to pre-qualify for a specific item before making a firm purchase decision, without risking impact to their credit score. Using a “soft pull,” the retailer gathers the necessary data to generate a non-binding yes/no decision and appropriate pricing, without registering the action on the credit report. The process is then repeated on a formal basis once the consumer officially decides to buy.
With data breaches a source of increasing concern for businesses and consumers alike, ARGO’s has taken the further step in its retail lending solutions of eliminating direct handling and storage of both social security numbers and tax identification numbers (TINs) in the decision and rules engine- bringing added peace of mind to both parties.
Although this example focuses on a large corporate retailer, point of sale lending can be a powerful catalyst to drive volume for a variety of small businesses as well. In those cases, financial institutions play a critical role in providing the point of sale lending technology infrastructure (encompassing hardware and software) enabling real-time credit decisions. We’ll address the bank model in greater detail in a future post, but be aware that retail lending offers opportunities across the spectrum- for shoppers (consumers and businesses), banks and credit unions, and sellers of all sizes.
For more information, check out our retail lending solution briefs on our website.