In just two decades, digital technology has gone from zero to connecting half the world’s population, and in the process democratizing and decentralizing the distribution of credit to consumers and other goods and services purchasers.
With banks losing their grip on the levers of lending as a consequence of this leveling, other organizations — from pizza parlors and doctors’ offices to community-development funders and capital-equipment providers — have stepped up to provide credit to their customers directly, efficiently, and securely.
Learn about the capabilities of TurnKey Lender Platform for streamlining any kind of embedded finance operations
In particular, many businesses and other groups have discovered they’re best served by one of two established financing models.
- Buy now, pay later (BNPL)
This loan divides a purchase into multiple equal payments, with the first payment typically due at the point of purchase. BNPL goes back to 1800s America as a way for cash-strapped consumers to make payments on relatively big-ticket items like furniture and farm machinery — and, unlike the classic “layaway” plan, they get to take possession of the object in question before it’s paid off.
- Merchant cash advance (MCA)
As a form of “business factoring,” an MCA is a lump sum that’s exchanged for a fixed percentage of the borrower’s sales receipts, with daily payments made over periods, typically, of less than two years. Often structured as a sale of future revenue cleared and settled via credit and debit cards, MCAs aren’t technically loans, but investments.
While garnering more and more attention in the marketplace, these digital-lending models still help businesses stand out from their competitors in a field with lots of room for growth and innovation.
“But configurability is a must” for success in direct lending, warns Elena Ionenko, co-founder and COO of TurnKey Lender, a financing-technology pioneer with operations around the world. “For BNPL and MCA providers to make credit available to customers without taking on too much risk, they need hyper-flexible origination, no-code configurability, and a credit ‘decisioning’ engine that can sort through large datasets to determine first if financing should be granted, and second what rates and other terms make the most sense on a case-by-case basis.”
Buy now, pay later considerations
BNPL providers tend to fall into one of two categories.
- Organizations that want to keep collections in-house
- Those that wish to be a BNPL provider for a specific industry in full confidence they can offer better decisioning, better origination, and a better user experience
The trouble is many third-party e-lending providers — who don’t share your understanding of your customer base — render lending decisions that are too harsh, too lenient, or unsuited to the needs of the niche you’re targeting. These shortfalls can expose you to unwarranted risk either way.
Luckily, there’s a better alternative for companies in both camps.
“With TurnKey Lender, businesses that want to keep origination and collections together in-house, and businesses that need customization to serve a particular niche — whether that’s in reference to a niche business catering to a particular industry or businesses whose consumer-oriented customers have particular needs — can leverage the power of artificial intelligence,” says Ionenko. “Coupled with configurability that doesn’t require coding and interoperability with system software, TurnKey Lender’s AI sets the standard for truly independent lenders.”
Merchant cash advance considerations
Merchant cash advance solutions are especially attractive to gig workers, who, like some app-based workers — think Doordash or Lyft — seek a degree of income predictability. In such cases, MCAs make perfect sense to workers and app providers alike.
TurnKey Lender’s MCA software:
- Unifies all MCA-management tasks in one software solution
- Renders MCA financing on terms that are calculated moment by moment using industry-leading AI
- Eliminates redundant paperwork
- Trims operational costs
- Puts collections on autopilot, sharply reducing the potential for human error
Financing application workflows are based on MCA use cases and suit the key verticals of the merchant cash advance industry, whether with gig-workers or large merchants.
An MCA applicant describes their business, income structure, and any other relevant details required for making an informed decision on the business performance in the future. This information is then used to determine the advance amount and the profits’ percentage to be charged on a daily, weekly, or monthly basis.
In addition to streamlining income for gig-economy workers, MCA providers get a built-in decision engine that leverages proprietary machine learning algorithms and deep neural networks to process real-time and historic bank statement data in addition to a configurable array of alternative (and largely behavioral) scoring inputs. Big data and AI ensure speed and accuracy in risk evaluation and finance decisioning.
More choices for digital-era customer financing
The AI use case for MCA providers doesn’t end there, however. With analytics derived from underwriting criteria as well as performance and behavioral data, MCA providers can extend multiple offers that take stock of rates, remittances, and repayment schedules.
We’ve mentioned that, because innovation is a constant in financial technology, a hosted software solution makes sense for MCA and BNPL providers alike. After all —
- Build it yourself, and you’re stuck with what you’ve got, with the R&D staff and budget needed to keep up with enhancements likely out of reach
- Outsource to a lending-service provider, and you’re relying on a business model best served by holding off on updates and improvements
- Meanwhile, a lending-as-a-service provider like TurnKey Lender knows there’s nothing to hide behind when the tech isn’t at (or beyond) the prevailing industry standard
Bottom line, organizations that provide either BNPL or MCA financing can run the leanest, most responsive, and most efficient operations using an embedded software solution, according to TurnKey Lender’s Ionenko. “The only question — and this is where we can provide guidance — is whether it makes more sense to choose our Transformer or our Standard platform,” she says.
