Building a consumer lending / BNPL business
There is no one-size-fits-all answer to this question, as the best way to start a consumer lending business will vary depending on the specific business model and goals of the company. However, some tips on how to get started in this industry include understanding the consumer lending process, finding the right partners and lenders, and developing marketing and sales strategies to reach potential borrowers.
Understanding the Consumer Lending Process
The first step in starting a consumer lending business is to understand the consumer lending process. This includes understanding the different types of loans available, the qualifying criteria for borrowers, and the steps involved in originating and servicing loans. Additionally, it is important to have a solid understanding of the regulations that govern consumer lending in order to ensure compliance with all laws and regulations.
Types of loans
Consumer lending encompasses all types of different loans
- consumer durables installment purchase (buy-now-pay-later)
- short term installment loans (pay day loans, salary loans)
- longer-term cash loans
- revolving loans, credit lines (credit card business)
Consumer durable installment loans
Durable goods are items with a lifespan of three years or more, such as cars and furniture. An installment loan is a loan where the borrower makes payments over time, typically in equal monthly payments, until the loan is paid in full.
Buy now pay later are a special kind of consumer durables loan, where the installments are split into 3-4 equal payments during a shorter term - usually weekly or bi-weekly.
Short-term installment loans
Short-term loans are typically smaller loans with terms of less than one year. These loans are typically repaid in one lump sum payment at the end of the loan term.
Payday loans, also known as salary loans, are a type of short-term loan where the borrower uses their next paycheck as collateral for the loan.
Longer-term cash loans
Longer-term loans are typically larger loans with terms of more than one year. These loans are typically repaid in equal monthly payments over the life of the loan.
A credit line is a type of loan where the borrower has access to a set amount of funds that they can draw from as needed. The borrower is only charged interest on the funds that they actually borrow.
Laws and regulations related to consumer lending
There are a number of laws and regulations that govern consumer lending in every jurisdiction. General ideas are related to the fair treatment of borrowers and being a responsible lender.
Responsible lending is related to the disclosure of key loan terms and conditions, assessing a borrower’s ability to repay a loan, and limiting loans to an amount that a borrower can reasonably be expected to repay.
Some jurisdictions limit the interest rate with a so-called rate cap. Some may require special considerations such as lending under Sharia law.
In general, consumer lending operations in most jurisdictions will require a license to operate.
Finding the Right Partners and Lenders
In order to originate loans, a consumer lending business will need to partner with entities that will fund it. Therefore, it is important to research and compare different lenders in order to find those that offer the best terms and rates. Additionally, it is important to build relationships with these lenders in order to establish a good working relationship.
The lenders are entities that will either fund loan portfolios or will take the loans on their books. Sometimes lenders can be large banks, private equity, or family offices that may want to deploy some capital.
Having access to funding for both equity and portfolio is a necessity for running and growing a consumer lending business.
Peer-to-peer funding alternative
An alternative to funding lending is peer-to-peer lending, where on one side there are retail investors investing in high-risk consumer loans. Each loan is paired with capital from an investor.
P2P lending is much more complex for operations, as it requires constant marketing to both sides - the small investors and to consumers. There may be also periods of mismatch - where there are borrowers, but no investors. Or there are investors ready, but no eligible loans for investment.
Developing Marketing and Sales StrategiesOnce the consumer lending business has a solid understanding of the consumer lending process and has established partnerships with lenders, the next step is to develop marketing and sales strategies to reach potential borrowers. This may include developing targeted marketing campaigns, creating a website and online presence, and developing a sales force to generate leads and close loans.
Loan comparison sites
These are general-purpose websites that list loan products from various lenders side-by-side so that consumers can compare and choose the best loan for their needs.
In order to be included on these websites, lenders will typically pay a fee. Some of these websites may also generate leads for lenders. The payment structure may be
- pay per lead provided
- pay per successfully converted lead.
Loan comparison sites generally collaborate with multiple lenders and may pass one lead to multiple lenders.
Loan Origination Platforms
Loan origination platforms are websites that connect borrowers with lenders. These platforms typically charge a fee to the lender for each loan that is originated through the platform.
A loan origination platform may behave like a white-label lender. So not only originating the loan but also providing information to a borrower regarding repayment.
Some advanced loan origination platforms may collaborate with lenders in such a way, that a lender exposes their decision logic endpoint for pre-approval. The pre-approval policy contains basic checks with any KO criteria and checks on block lists.
Loan origination platforms either work on a pay per customer or are based on a revenue-sharing business model.
The decision-making process on the loan origination platforms is focused on segmenting both lenders and borrowers. A mature loan origination platform focuses on providing a borrower with the highest probability of approval for a loan.
Some consumer lending businesses may develop a merchant network. A merchant network is a group of merchants that have agreed to promote and sell the consumer lending products of the business. Merchant networks may be developed through partnerships, affiliate relationships, or other arrangements.
BNPL and consumer durable installment lending businesses usually depend on building and maintaining a large merchant network.
Merchants are motivated to collaborate with lenders because purchases using loans increase sales.
Another option for reaching potential borrowers is to develop a sales force. A sales force is a group of salespeople that are employed by the consumer lending business to generate leads and close loans.
Salespeople may be employed directly by the consumer lending business or they may be independent contractors.
A sales force may be used to reach potential borrowers through
- online marketing
- offline marketing
- events and tradeshows
- personal networking.
Benefits of having own sales network
Developing and managing a sales force for consumer lending can have many benefits. A sales force
- can generate a high volume of leads
- can be used to reach potential borrowers in multiple channels
- can be used to close loans
- can provide feedback to the consumer lending business about borrower needs and preferences
- can help to build relationships with potential borrowers
- can help to build relationships with merchants
Downsides of having on sales network
However, having own sales force can have also many negative aspects. A sales force
- can be expensive to maintain.
- may require significant training and management.
- may have a high turnover.
- may not be effective in all markets.
- may not be effective in all channels.
- sales can be a vector for fraud.
Building a strong sales force takes time, effort, and resources. Managing the sales force requires continuous training and monitoring quality using mystery shopping and other tools.
Operating a Consumer Lending Business
Once the consumer lending business has established relationships with lenders and has developed marketing and sales strategies, the next step is to begin operating the business. This includes origination loans, servicing loans, and collecting payments.
Originating loans is the process of taking loan applications from potential borrowers and submitting them to lenders for approval.
The loan origination process typically includes the following steps:
- Borrowers apply for loans online or in person.
- Applications are reviewed and screened for eligibility.
- Applications that meet the eligibility requirements are forwarded to lenders for approval.
- Lenders review applications and make credit decisions.
- Lenders provide loan offers to borrowers.
- Borrowers review loan offers and select the offer they wish to accept.
- Loan documents are prepared and signed.
- Loans are funded and disbursed to borrowers.
Once a loan has been originated and funded, the consumer lending business will typically service the loan. This includes collecting loan payments, responding to customer inquiries, and managing customer accounts.
The loan servicing process typically includes the following steps:
- Borrowers make loan payments.
- Payments are processed and posted to borrower accounts.
- Late payments are identified and processed.
- Customer inquiries are received and addressed.
- Customer accounts are managed.
Debt collections / debt recovery
The collections process is used to collect payments from borrowers who are delinquent on their loan payments. The collections process
- starts when a borrower becomes delinquent on a loan payment.
- communications are sent to the borrower regarding the delinquent payment.
- telephone calls are made to the borrower to collect the delinquent payment.
- arrangements are made with the borrower to repay the delinquent payment.
- payments are collected from the borrower.
The collections process may be managed by the consumer lending business or it may be outsourced to a third-party collections agency or a law firm.
Loans may also be sold to a debt buyer. A debt buyer is a company that purchases delinquent loans from lenders in order to collect the payments.
Consumer lending businesses are subject to a number of risks, including
- credit risk
- operational risk
- compliance risk
- reputation risk
- legal risk.
Credit risk is the risk of loss that may occur if a borrower defaults on a loan. Operational risk is the risk of loss that may occur from the day-to-day operations of the business. Compliance risk is the risk of loss that may occur from non-compliance with laws and regulations. Reputation risk is the risk of loss that may occur from damage to the reputation of the business. Legal risk is the risk of loss that may occur from operating the business.
Portfolio management and increasing lifetime value
Portfolio management is the process of managing a portfolio of loans. A portfolio of loans is a group of loans that have been originated by a consumer lending business. Portfolio management includes
- reviewing the performance of loans
- identifying loans that are at risk of default
- taking action to prevent loan defaults
- taking action to improve the performance of loans.
Portfolio management is a critical function of consumer lending businesses.
Inceasing life-time value
Lifetime value is the total value of a customer over the lifetime of the customer relationship. Lifetime value is a key metric for consumer lending businesses and increasing it happens usually by cross-selling or upselling to eligible customers.
An example scenario is offering a credit card to a customer, who has started as a customer of a BNPL product.
Consumer lending businesses use technology to manage their operations. Technology is used to manage customer accounts, process loan applications, originate loans, service loans, collect payments, and manage risk. Technology is also used to develop marketing and sales strategies.
The use of technology has several advantages for consumer lending businesses. Technology
- reduces the costs of operations
- increases the efficiency of operations
- enhances decision making
- improves customer service
- facilitates compliance with laws and regulations.
The usual architecture for consumer lending would be built from:
- customer-facing app
- merchant/sales-facing app
- core system - loan origination system
- payment processing and pairing system
- loan approval system - decision engine
- collections system
- customer relationship management system
- call-center system
- data warehouse
- analytical platform and software.