Alternative Finances

Making The Supply And The Demand Match In Consumer Financing

Among the biggest challenges to doing something new — particularly in retail — is overcoming the mountain known as “what has already been done.” Because whatever it is that is already being done has a lot going for it — the merchant is used to it, the staff is trained to deliver and support it, everyone understands it and it generates a desired result.

And even if it’s not doing that last one so well anymore — or if there an even more desirable result just waiting on the horizon — overcoming the first part of the list is often easier said than done. It involves an investment of time, talent and treasure that may all very well go to waste, as many more things have been sold as game-changing solutions than there are actual game changing solutions in the world.

Such is the world of retailer-backed financing, or store credit — almost two-decades into the 21st century but still largely clinging to what Vyze CEO Keith Nealon described to Karen Webster as an essentially 20th century model with some significant flaws. They come by the choice for rational reasons — retailers can’t integrate 100 lenders at the POS, and so instead they chose one to stand behind their underwriting (usually a storebranded card) and then live within the limits of that choice.

“The traditional paradigm of growth via financing is to integrate with a single lender,” Nealon told Webster.” So they’ve fixed that first friction by doing a single integration with that single lender integrated. The problem is retailers serve many customer demographics, but lenders underwrite to one or two.”

And that mismatch between the customer and lenders is adding up to an awful lot of missed opportunity for everyone involved in the transaction. When a customer applies for a card in a store, they get turned down an awful lot, about 50 percent of the time. Online, those numbers actually get worse — 75 percent of the time, consumers get turned down. That means that often the customer is either not buying at all, or buying less than they wanted to.

Plus, Nealon noted, no one has a good time when a customer agrees to apply for the store card and then has to be told that, for reasons unknown, they’ve been turned down.

“When 50 percent of the time the customer gets declined, that is sort of embarrassing for the consumer and the associate. If I gave you a product that worked half the time and you needed it, would you want to rely on it? Because that is actually what is happening with store associates in a single point lender system, and it is hard to get anyone interested or invested in using something where they might be setting themselves up for a bad experience.”

Vyze wants to end the bad experience for everyone without having to add on a pile of new complexity for either customers or users. The idea is simple — one POS integration, but access to a wide swath of lenders ready to roll on underwriting a lot of different credit profiles.

How does it work – and what’s next?

The Supply And Demand Problem

The issue is simple, noted Nealon. There are a lot of consumer credit profiles out there: super-prime, prime, near prime, sub-prime, deep-subprime, thin credit, too young for credit, etc. And those are still the big categories — regular readers know it gets a lot more granular from there.

And in an increasingly diverse financial services landscape, all of those consumers can find lending and credit products that work for them — but there is no single lender that is going to serve all of those profiles.

“There is lending supply for these consumers, consumer want it, but retailers can’t efficiently connect that supply to demand by themselves,” Nealson noted.

In the past, that was just a hard limit, because the alternative was trying to set up a series of integrations for a series of lenders — which is far, far from what any sane merchant (particularly a small or medium sized one) is going to put themselves through — and the single lender system worked, if sub-optimally.

“Traditional lenders have done a fine job with what was possible. But now you have newer players in the alternative lending space coming into the market, which is creating competition among ways to grow. Our job is basically to make the market connect efficiently.”

The Vyze marketplace does that — but, perhaps more importantly, does it in a way that is very recognizable to all parties.

Same Experience, Better Outcome

For whatever limits the current single lender system has, simplicity is its very significant virtue. Customers are asked if they want to apply for store credit — usually combined with a discount offer of some kind — and they do so. A minute or so later, customers get their approval or denial — in an almost coin flip-like way.

The customers who get the “yes” presumably take their store card and make their buy. Statistically speaking, they will go on to buy more during that trip and become more loyal to the store in general.

The “no” consumer, on the other hand, is embarrassed and put off — maybe doesn’t buy, certainly buys less and the retailer doesn’t enjoy any loyalty bounce.

Vyze’s thought: take the one part of that that really works well — the POS as the application point — and innovate around everything that happens after the customer gives over a social security number.

“Same look and feel, you apply. We can supply lending to basically all consumers — prime, super prime, near prime, etc. But you have the same experience at the POS. A prime customer likely has an identical experience to what they have today. But say you are a near prime — instead of hearing you are not approved, you will hear something to the effect of, “It looks like we can’t get you the store credit card A, but we do have store credit card B — would you like to look at those terms?” They can say yes or no — but what Vyze has done is find a match for that consumer and given them a choice, helped the lender secure a customer and the retailer make this and future conversions.”

But, Nealon noted, the magic is this is all happening within everyone’s existent workflow. The consumer is already shopping, the sales associate has not relearned a new process because they are doing essentially the same thing they’ve already done but ending with something other than a bad outcome more than half the time.

And if everyone can swap a good outcome for a bad outcome — while making a minimal change to what they’re already doing — that’s a win for everyone.

What’s Next

The biggest challenge for a multi-sided platform like Vyze is that early chicken and egg problem. Can’t get lenders into the platform without retailers already signed on providing valuable access to all those potential consumers, but can’t get retailers signed on until there are enough lenders to meet all levels of consumer demand.

Squaring that circle is beyond hard — it is the rocks that most multi-sided business wreck on — but Vyze has made it through the gauntlet and to the magical other side where network effects mean the platform begins symbiotically growing itself.

Part of that, Nealon noted, is that retailers have seen the light about tech in many ways.

“Retailers are under growth pressure and have become more interested in really using technology as a differentiator for their customers.”

Moreover, he noted, the market is ready for a better and more inclusive way to do retailer financing.

“This is the year of acceleration. Our goal first and foremost is to create the best customer experience, making sure the retailer can cover the customer with a quick, easy, simple experience that is enjoyable and makes them able to pay,” Nealon noted. “We are also looking from a data perspective at ways to better understand the consumer and better optimize the lending supply on a regional level and really adjust what kind of products are delivered.”

The opportunity is there, Nealon told Webster — Vyze isn’t trying to grow a market out of thin air so much as it is trying to capture the nearly half-trillion dollars in lost opportunity that retail financing offers each year. It took a while to get to scale — but now they’re there, they’re ready to race.

We’ll keep you updated from the trail.

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