Following the devastating financial crisis, risk-averse banks responded by backing away from offering all forms of consumer lending, particularly to “mass-market” and budding middle-class customers.
However, providing merchant credit, which involves lending to consumers via retailers is even more critical for financial institutions, retailers, and their customers. More importantly, both retailers and lenders have discovered that having robust credit capabilities embedded within their point of sale holds immense value for their customers as well as their bottom line.
Retailers And Banking Partners As Leading Sources Of Credit
Historically, both retailers and banking partners were the primary founts of credit. This developed out of necessity since customers with flawed or limited credit histories needed credit in order to have access to the products they wanted.
If this option did not exist, customers would be forced to purchase lower quality products at lower prices. Ultimately, the product would offer less value to both the customer as well as the retailer.
In order to mitigate the potential risk due to offering “mass-market merchant credit”, lenders have relied heavily on higher interest rates. Retailers offset their risk with the income generated from increased sales.
Merchant Credit Undergoes Digital Transformation
Driven by digital technology, merchant credit is experiencing a transformation due to an ever-increasing quantity of data on the shopping habits and preferences of customers. There are also digital channels that promote customer engagement and it also allows the delivery of the latest credit offers for higher-priced products.
Once consumers redeem these offers, more data is released, which leads to increased engagement and more spending. It greatly facilitates getting what the customer wants when they want it.
Online retailers are inundated with enough data to determine their customers’ behavior and preferences. In order to convert this essential data into financial gain, the shopping behavior must be matched with the data from financial services. For example, when shopping data is linked to their bank account and past credit history, merchant-lenders are then able to approximate the customer’s income and their ability to repay the loan.
Retailers and issuers can also combine consumer purchase information, along with social media and “non-traditional digital data sources” to determine credit risk. This greatly facilitates the ability to provide credit products that are customized. When this evaluation is carried out effectively, this data helps issuers and merchants to determine whether to offer “installment, private-label, or co-branded cards”, to these customers.
When you combine fresh data sources and omnipresent connectivity, mostly through cell phones, it is no wonder that this has become a major driver of the digital transformation of merchant credit.
Significant Implications Of Digital Transformation Of Merchant Credit
There are enormous opportunities in the digital transformation of merchant credit. When credit offers are digitally enabled, it boosts customer loyalty. There is also an increase in a retailer’s return on investment in “big data analytics” in digital technology as well as big data analytics.