At the start of the year, businesses of all sizes are narrowing in on their goals and priorities. Verdata set out to unearth the biggest challenges facing companies, including the impact economic shifts are having on point-of-sale finance. Topping the list of concerns is higher financing costs, economic uncertainty, and rippling effects on merchants and consumers. As the macroenvironment deteriorates and pressure on small businesses increases, fraud is rising across the embedded finance ecosystem. Some challenges include fraudulent chargebacks, account takeovers, friendly fraud, and other abuses of the point-of-sale finance process.
Companies within point-of-sale finance are rushing to assess the negative financial impact of fraud, often adjusting previous projections once considered conservative. As if fraud losses weren’t enough to keep the industry busy, new and increasing regulatory pressure is visible.
The Consumer Financial Protection Bureau (CFPB) shared that a significant area of focus relates to Buy Now, Pay Later (BNPL) loans and the ten-fold increase in loan volume over the last few years. Inconsistent consumer protections and debt accumulation are two of the areas regulators are particularly interested in reforming.
Beyond the loss of real dollars, the increasing scrutiny from the CFPB related to service and delivery issues and customer service complaints is spurring financing companies to vet their merchant partners more thoroughly.
So why is Verdata focusing on the impact economic shifts have on point-of-sale finance?
According to Mckinsey, the US point-of-sale finance industry is growing faster than traditional unsecured loans, with a CAGR of 20% from 2018 to 2021. Additionally, the industry is an early precursor of the embedded finance movement, likely to have a lasting impact for years, if not decades, to come.
Alexandria Jacobson from Built In describes embedded finance as, “The integration of financial services like lending, payment processing or insurance into nonfinancial businesses’ infrastructures…”.
You can see embedded finance in our daily lives. Consider emergency car maintenance in which consumers can finance their repair directly through the auto repair shop. Significant expenditures, such as home improvements, are also prime candidates for embedded finance. A homeowner can now secure a reasonable interest rate for a kitchen renovation by partnering with their contractor for financing. Lastly, the opportunities within healthcare are multiplying, with many companies financing dental, eye, and other elective procedures. Merchants are poised to drive sales by offering better and more innovative financing options, and consumers can live in a world where they no longer have to put essential purchases on hold, according to Koalifi.
While the shift toward embedded finance is a net positive for merchants and consumers, rising interest rates and a tightening macroenvironment may tempt participants to misbehave. Point-of-sale companies and those within adjacent industries are shifting their focus to capitalize on the momentum and minimize the risk.
What will enable those within the point-of-sale finance industry to thrive in this brave new world of embedded finance?
Two things come to mind:
- A deep understanding of merchants
- A reliable third-party partner with the essential information
Simply put, those that invest in better data and analytics about partners will better manage fraud and risk, likely resulting in significant financial gains. Accurately assessing risk and capitalizing on opportunities will require the following:
- A thorough process for identifying a merchant’s identity and the principal(s) associated with the business
- An awareness of historical merchant behaviors and actions with peers or similar relationships
- Knowledge of how merchants treat their customers
- An assessment of whether a merchant’s customers are likely to come back
The “must have” list extends beyond the items mentioned above. In most cases, answering these four merchant questions requires more data than a company has available. Merchant identity verification, historical behavioral insights, and sentiment analysis are the key variables used to calculate reputational risk, and they are in short supply without a strong partner.
To learn more about the available data and analytics, click here.