With change comes challenge, but with challenge comes opportunity.
As 2023 marches on, much of the initial doom and gloom-fueled skepticism around how the year would play out has abated, and there is hope on the horizon.
“The one big thing we are talking about with our clients, both lenders and merchants, is what exactly they should be doing — what are the products and solutions that will be the differentiator to help drive their business, grow sales, take care of customers, and bring people back again for other additional purchases at a later date,” Ed O’Donnell, CEO at Versatile Credit, told PYMNTS CEO Karen Webster.
“It is all about the experience, and that changes for lenders versus merchants,” O’Donnell added.
For lenders, the rise of FinTechs and digital products, including BNPL (buy now, pay later), has forced traditional lenders to diversify, enhance and expand their offerings to remain competitive from a product and experience standpoint, he explained.
“Just having the old-fashioned retail private label credit card out there is not enough to win business and, more importantly, keep the business after you’ve won it,” O’Donnell said.
But what does this evolving credit landscape mean for merchants?
After all, having options is a good thing — but too many options can be overwhelming for merchants and consumers, and obscure the true business use cases and benefits of a particular solution.
“Nobody wants to manage 50 different relationships and stack all of that technology, along with the lift it requires,” O’Donnell said.
That is why many merchants are turning to credit aggregator platforms for guidance in narrowing their decision-making process.
The credit landscape has seen some surprising trends in recent months. New credit card applications are up about 25%, but the rejection rates are also high at around 22%, the highest since 2018.
“What we’ve seen is that using the old metrics such as approval rate and take rate is not enough,” O’Donnell said. “You really have to focus on what’s the throughput. And we have seen that even in households making well over $100,000 in annual income, they’ve moved in many cases from the prime credit box to the near-prime credit box for a variety of different reasons.”
O’Donnell sees this as an opportunity for merchants to adapt and cater to these shifting customer segments, as well as highlighting the crucial importance of offering a diverse range of products and staying up to date with market trends.
He also emphasized the importance of having the right mix of products and lenders to meet the changing environment.
“The near prime lenders are very happy to earn that business … it helps balance the credit risk that they take in their core business,” O’Donnell said. “Matching my need to the correct payment is really a critical decision.”
With the capability to provide diverse choices and stay competitive in the market, retailers and lenders alike can drive business, grow sales, and provide a stellar customer experience.
As the credit market adapts, monitoring lender behavior and loan performance becomes paramount. This vigilance and caution allows lenders to react quickly to any disruptions and ensure a stable and resilient credit market, but is also leading to a higher rejection rate for credit card applications.
However, this measured approach encourages a range of credit options tailored to suit various financial situations and consumer credit scores.
“You really don’t want lenders taking on excessive credit risk. It may be fine temporarily, but in the long run, that will actually hurt buyers and consumers because there’ll be less choice, fewer lenders available,” O’Donnell said.
“I think it’s appropriate. It is the way the system is designed to work,” he said. “The more choices you can provide, the better it is for everyone.”
Particularly as the holiday season approaches and retailers and lenders are increasingly working together to attract new customers while at the same time helping consumers make informed choices about their purchases.
“It is a great time for merchants that are able to provide products that make sense for their particular business, and it’s no longer one size fits all. The lenders have gotten really smart about what works in one vertical versus another,” O’Donnell said.