Why BNPL Approval Rates Matter to Merchants and Lenders

As economies worldwide recover from the COVID-19 pandemic’s crippling effect on financial markets, many shoppers seek low-risk ways to fund their purchases. Doing so often requires no-interest buy now, pay later (BNPL) financing solutions that grant consumers immediate access to desired goods with an obligation payable over time. However, these lending products are only as effective as their accessibility to customers, making BNPL approval rates critical to generating new business.

How are BNPL Approval Rates Determined?

BNPL provides a lax financing environment with soft credit checks, and approval rates are high relative to traditional lending practices. Unless the consumer is looking to purchase a “big-ticket item'' (typically $2,000 and above in the BNPL space), lenders impose few barriers to approval.

With this lack of in-depth credit checks or financial requirements comes more opportunities to approve customers for financing. 

The benefits of these enhanced approval rates include:

• Improved AOVs
• Higher sales
• Decreased cart abandonment rates
• Increased return customer rate 

However, those larger purchases expose lenders to more significant monetary risks and often warrant a more stringent set of approval criteria based on specific data points. 

Those data points often include:

• Payment history: Whether a consumer pays back existing loans on time is often indicative of reliability.
• Outstanding debt: The more money a consumer owes, the less likely they are to repay all their creditors.
• Credit history length: Lenders typically cannot evaluate consumer creditworthiness if they have little to no established credit history. 
• Number of new accounts: Several open accounts may signify that a consumer has minimal financial liquidity and is overborrowing.
• Credit type: Several outstanding high-interest, short-term loans could mean the borrower is struggling to make good on week-to-week obligations.

Factors that Impact Merchant Sales 

Merchants face many factors that might impact sales performance, including: 

Internal factors 

Internal factors are those that originate within the organization and are addressable if not controllable. 

These internal might include: 

• Marketing: When it comes to sales, an organization’s marketing strategy is essential. Marketing strategies entail identifying the right target demographic, positioning the brand, and setting the right price, among other things. When an organization accomplishes all these objectives correctly, it can significantly impact a product's sales. 
• Technology: Any company looking to increase sales must enhance its technology. Automating business procedures through innovative technology investment such as electronic payment systems and automated order booking can help businesses grow their market base and increase revenues. To correctly manage their supply, merchants should consider installing inventory management software.
•  Financing options: The availability of sufficient capital at critical times, such as when launching new items, upgrading your manufacturing technique, or running a pricey campaign, necessitates a considerable sum of money. If a company has enough cash on hand, it can be simple to implement new business practices to boost sales.

External factors

External factors are those that originate outside the company. While a company cannot control the outcomes of such events, it can formulate strategies to safeguard against them. 

These external might include:

• Competition: A competing product’s market positioning significantly impacts a particular company’s product sales. If the competition has a well-known brand with a considerable market share, its presence may negatively impact the sales of the rivals.
• Economic cycles: Any country’s economy goes through periods of expansion and recession, and these cycles often dictate demand for any given product. During a period of growth, demand is strong because consumers have discretionary income. During a recession, however, demand drops as customers can save less money for non-necessities.
• Consumer preferences: Consumer interests and preferences regarding costs, updated features, and shipping methods constantly change, affecting product demand significantly. A business does not influence these ever-changing expectations—it can only adjust its production and advertising strategies to meet customer needs better.

Why BNPL Approval Rates Matter to Lenders

A lender’s repayment risk—or the chance that the borrower does not meet their payback obligations—increases as the number of outstanding loans increases. 

While lenient financial requirements and high approval rates bring in more business for lenders, each new borrower represents increased risk exposure. If a lender were to overextend credit to a pool of subprime borrowers, they find themselves involved in a collections process. 

While many analysts consider a loan term of thirty or so days a safe unsecured financing, many lenders are discovering these obligations can go unmet in today’s trying times.

Why Customers Miss Payments 

There are many reasons why a borrower does not pay off their debts. Three common reasons are as follows:

• There are no immediate repercussions: Recouping unpaid debts can be challenging. If a borrower is not making regular payments or paying late fees, there is very little a lender can do in the short term.
• BNPL loans might be a low priority: Borrowers could have more pressing matters to address, such as rent and utilities. If it comes down to holding down a place to live and keeping the lights on, borrowers will focus on those debts before anything else.
• Borrowers face challenging times: Sometimes, it is not a matter of priority. The borrower has fallen on difficult financial times and cannot meet any payment deadlines as initially promised.

Skeps Point-of-Sale BNPL Solutions Can Help You Grow

Any business’ success depends significantly on its acquisition of new customers. However, although cash will always be king, attracting those customers may require offering alternative payment options with attractive approval rates, such as BNPL financing solutions.

Still, both merchants and lenders should establish reasonable approval rates to maintain an effective balance between a healthy sales rate and appropriate risk exposure.