The Making Of A Digital Subprime Marketplace

No one needs to be told that eCommerce is becoming a more important part of consumers’ daily lives. Any number of stats — from the 2018 holiday shopping season, for instance, or a Deep Dive by PYMNTS into how much shoppers spend with Amazon — confirm that.

However, far less attention is paid to one strand of the story: the role of digital retail, and the increasingly sophisticated role that consumer data analysis plays in bringing more online retail options to consumers living paycheck to paycheck, or who face other challenges when it comes to buying goods via a line of credit.

In a new PYMNTS interview, Karen Webster spoke with Marc Schneider, CEO and Co-founder at Zebit, an digital marketplace that strives to win the loyalty of consumers who carry relatively high credit risks, and do so without charging interest or membership fees. The interview came as Zebit — founded in late 2015, but didn’t get to full steam until 2017, he said — reported having more than 300,000 users, and that it expects to earn $100 million in revenue in 2019.

True Zero Percent

According to Schneider, Zebit offers “true zero percent financing to a mass audience,” and does so via a debit-based proprietary payment system that rests on an analysis of consumer data to determine their risk of default. People who register with Zebit can gain access to a $2,500 line of funds, have six months to pay off their purchases and keep buying as long as they stay up to date with their payments. The company makes its money from retail sales — more on that later.

Consumers with relatively low income or low credit scores have long had access to layaway programs and rent-to-own commerce, of course — to say nothing of payday loans. The idea behind Zebit — an idea anchored to high-level data analysis — is to not only offer what amounts to a no-cost loan, but to do so in a way that provides access to products needed for daily life, along with such consumer goods as electronics.

Indeed, that idea relies on the concept of “de-risking consumers,” Schneider told Webster, “and to bridge the gap between commerce and FinTech.” He said some 80 percent of consumers live paycheck to paycheck — a large potential base of customers.

Machine Learning

Approved Zebit buyers do need sustainable sources of income, but the company does not check applicants’ credit scores. Instead, it uses machine learning technology to sift through data and assess risk, a determination that is used to craft payments, product accessibility and checkout options for each customer.

“We are a closed marketplace, and track all the behavior of all our customers,” he said. “We are able to build powerful [risk-assessment] models.”

He added that the cost of customer acquisition stands at about $10. That compares to $50 for more traditional eCommerce operators, and to about $300 or above for more traditional lenders.

Prices for products sold on Zebit can run lower or about the same for some items, but can also be higher than found in other places. Electronics, for instance, can be as much as 20 percent because of the thin margins on those products, but Schneider said that is not an attempt to impose hidden financing charges.

In fact, he emphasized, it’s quite the opposite. As Zebit grows, gains more consumers and earns more leverage from drop shippers, those prices will likely go down — at least, in general.

Financial Invisibles

The growth of Zebit — along with other businesses that are trying to gain more wallet share from paycheck to paycheck, and similar consumers — comes as more focus shifts to people who have relatively little financial cushion, and relatively little credit. Those served as main themes for coverage of the recent U.S. federal government shutdown, but fresh PYMNTS research offers an even deeper look into that issue.

According to the newest “Financial Invisible Report,” consumers have been feeling more confident in their financial stability because they were using credit cards to pay their bills, even among consumers with high annual incomes. In fact, the average income of consumers who took out pawnshop loans was surprisingly high at $78,600 per year. Meanwhile, the average income of those who took out payday loans was even higher at $80,500 per year.

Among the keys of success for online retail firms that serve consumers with thin financial cushions — besides having the data analysis to accurately predict who will pay off their bills, and who will default — is becoming a destination, not just a platform, according to Schneider. The general psychology behind that involves getting the worthy consumers — as opposed to the “bad actors” who won’t pay back their loans — to think of it as a positive experience. Timely payments keep those credit lines alive, after all.

Schneider said the site’s typical consumer has a 550 credit score and below, “deep subprime.” Yet, repayments of the loans to Zebit — which underwrites the borrowing and serves as the merchant of record — will not impress the credit bureaus. That’s because, as Schneider explained, those bureaus and their technologies tend to see Zebit purchases as consumers “accessing credit in a repetitive way.”

Model Expansion?

Even so, such a model offers numerous possibilities for expansion (assuming the risk-assessment model being used is indeed accurate and does not result in massive defaults, which lead to negative PR and deflect investors). “Debit can also work for small and medium-sized businesses,” he said when discussing plans to test a Zebit B2B program later this year that would offer a lending line of $25,000.

Much of the opportunity that Schneider sees for this model stems from the intimate data that Zebit has about its customers, who are also buying from other retailers no matter how loyal they might be to a particular digital marketplace. For example, say a Zebit customer goes into a Best Buy in search of headphones. That customer is unlikely to qualify for any credit card promoted at the Best Buy point of sale (POS), but if Zebit could do the “POS underwriting,” he said, that could open another retail possibility for such a chain.

No matter what the future brings for Zebit, its experiences and plans underscore the appeal of this particular and broad consumer segment (which includes people of all ages, including millennials, retirees and veterans.) “The market here is untapped,” he said.