Buy Now Pay Later Redefines Credit Worthiness

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For the roughly 54 percent of Americans that have prime or super-prime credit, according to U.S. Consumer Financial Protection Bureau data, access to underwriting is rarely a concern. The biggest difficulty holders of prime credit scores face when seeking credit is in selecting which of the low-rate, high cash-back offers thrown in front of them they are going to accept. But for those with subprime scores (18 percent), thin credit file (11 percent) or no file at all (11 percent) getting access to underwriting can be a difficult and expensive proposition, if it is possible at all — often leaving those consumers with a cash flow crunch created by unexpected expenses cropping up, without access to mainstream credit avenues to help alleviate them.

And while it is undeniably important for underwriters to properly assess risk, the FICO score model may not actually be the best tool for that purpose, Sezzle Chief Technology Officer Killian Brackey told PYMNTS in a recent conversation, as it can lock out potentially good customers while attempting to weed out the bad.

“We’re finding FICO credit vision scores don’t really capture the full picture of credit worthiness for the shorter term, smaller limit installment product,” he said. “There could be a number of reasons why the score is lower today for a customer — it could be that they just started paying down their student loans, or they’re not getting credit for things like paying their phone bills or other things that people are doing. We take the approach that customers are low-risk and responsible and … see paying with zero interest is a smarter way to purchase and budget responsibly.”

Consumers Are Wary Of Interest

High-interest rates and fees, he said, present a learning curve so steep for new users to the credit world that they can, in some cases, verge on the predatory. Sezzle’s approach is a FICO-free underwriting path for consumers in early use applications, he said.  Because Sezzle constantly updates its creditworthiness model, it can identify which customers are a good risk of repayment for the kinds of short-term installment credit products it offers. The firm doesn’t use FICO scoring to determine creditworthiness, he said, but it does sample the shopper to model where they are on that FICO scoring range.

What they tend to see, he said, is a better snapshot of the consumer.

“We rely on a lot of testing and fast testing of our models and underwriting models and fraud models that looked beyond that FICO score and provide a more meaningful, complementary, comprehensive view of the customer and their creditworthiness identity,” he said, “and then tying together these 50-plus data sources in a number of these models to really help get a better picture of identity and credit worthiness with where the customer actually is in their journey today.”

Prime To Be Consumers

But the goal, he said, is bigger, as Sezzle’s mission isn’t just to help consumers who are considered subprime — consumers Sezzle refers to in-house as future-prime — get better access to credit. That is something the company accomplishes, but it also believes that part of its mission is helping the consumer have a real choice when it comes to financial products in the future.

Even if that choice will in some cases lead them away from the Sezzle platform. In many ways, Sezzle and its buy now, pay later (BNPL) offering is “training wheels for traditional credit products,” he said. By getting consumers into that habit of paying their purchase down every two weeks, and with the safeguards against overspending automatically built in, he said, the platform as a whole is designed to help the shopper and grow.

“We look at them at least monthly for every shopper, and we put people on a graduated path. So they’ll often start with something like [a couple hundred dollar] limit and be able to grow that gradually up to [a few thousand dollar] limit within our platform,” he said. “And so a lot of customers without credit find it very hard to get a credit card or spending limit that really allows them to gain trust, spend responsibly in a safe way.”

Because, Brackey said, the issue at the heart of the matter for credit skeptics cutting a wide swath around the segment in general, often to their own detriment, is trust. There is a large cohort of credit skeptics who are a little bit more hesitant toward those traditional products. As consumers look for transparency and interest in fees, and by and large not finding it in the traditional credit segment, he said, they are gravitating to BNPL models because those models are, among other things, very transparent.

From Credit Skeptics To Credit Builders

“Our hope is that we can help people move into being credit builders through Sezzle, which is our financial education platform, designed to help steer people in that direction,” he said. “We’re not going to necessarily push or force it because people have different reasons for using different products. We think that the most important way to get there is to continue to build trust on our side.”  Recent research shows that consumers very much want education to be part of their relationship with financial tools. With that in mind, Sezzle launched Sezzle Up last year to help users improve their financial literacy and boost their credit scores.

Financial services are all about trust, he said, and consumers who remain skeptical about credit have simply learned not to trust it as a tool that can be good for their financial lives. Sezzle thinks it’s OK to be a credit skeptic as long as that is a customer’s choice, not a reality forced on them by the underwriting rules as they exist today.

What Sezzle is intent on proving, he said, is that the rules of underwriting can be rewritten to create a system that’s far more inclusive, without being much riskier, and that provides adequate levels of choice for all involved.



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