Buy Now, Pay Later,” that point-of-sale tool consumers are increasingly using to break purchases into bite-sized payments, may be the flavor of the month to some, but it doesn’t whet Greg Ohlendorf’s appetite. “There’s plenty to criticize about BNPL,” said Ohlendorf, president and CEO of northeastern Illinois’ First Community Bank and Trust in Beecher. “Especially when people are using it at Target and half of their purchase contains consumables.”
Ohlendorf is not alone among his peers when panning BNPL. A survey conducted by IntraFi with leaders of 426 banks revealed that 80 percent have “little or no interest” in offering BNPL.
In the field opposite banker disinterest stand consumers who, facing rising prices on just about every front, remain committed to what is arguably America’s favorite pastime: Shopping. A Forbes Advisor survey conducted last November indicated that 64 percent of consumers planned to avail themselves of BNPL during the 2022 holiday shopping season. A McKinsey study, meanwhile, shows 60 percent of consumers say they are likely to use point-of-sale financing over the next six to 12 months.
At its essence, BNPL is a short-term, unsecured loan. That large fintechs such as Klarna and Afterpay and Affirm and Sezzle offer such loans with zero interest — and little regard to one’s ability to repay — should be met with a mix of caution and skepticism, for consumers and community bankers alike.
“BNPL is where the shiny object is,” said Don Shafer, co-founder of the digital lending tool Quilo. “The reason you want to be aware is because all the fintechs doing those loans are offering banking services too. So the danger, the relevancy, is the threat that these fintechs are taking customers.”
An article published by S&P Global Market Intelligence indicated BNPL providers are “enhancing their value propositions by layering on banking services such as checking accounts and debit cards, putting pressure on traditional financial institutions.”
In reality and in practice, the ability to offer an alternative to BNPL is but one small facet of how Shafer and Quilo co-founder Boris Fuzayloff intend to help community bankers stand strong against these fintechs, fight customer attrition, appeal to new, younger customers, and gain a new revenue stream by deploying their end-to-end digital lending tool. They’re talking about Quilo not only as the always-on-the-clock loan officer, but as one of several ways they intend to help community bankers keep the franchise relevant.
Lending for ‘financial wellness’
Customers of community banks typically are older, wealthier and are prime credits, Fuzayloff said. As such, they have a multitude of options to acquire goods.
There’s always the credit card, and who carries just one credit card these days? “We know 90 percent of community bank customers use a big-bank issued credit card,” Shafer said. “Those companies offer installment loans and about 15 percent of cardholders avail themselves of that credit. That’s a miss.”
Additionally, fintechs such as Upstart, Upgrade and BestEgg market installment loans in order for people to pay down credit card debt, which is mounting. Equifax reported that last year, 42 percent of Americans carried a credit card balance of about $7,000. With interest rates up, the cost of carrying such card balances has grown.
“We look at Quilo as a financial wellness tool that helps us target individuals who are buried under revolving lines of credit,” Ohlendorf said. This financial wellness approach shifts a high-interest debt load from the big bank card program, moving it onto a community bank’s balance sheet at a lower interest rate.
“This Quilo is kind of like having a credit card program,” commented Michael Vizard, CEO of the $516 million Cross Keys Bank in St. Joseph, La., “but at a much reduced rate.”
Quilo loans can be made for as little as $250 or up to $25,000, with the entire process completed digitally, using a smartphone.
“Consumers are running their entire lives” by the phone in their pocket, Ohlendorf said. Setting up loans on the fly during the Paycheck Protection Program in 2020-21 demonstrated to Ohlendorf and his team that bank customers were more tech-savvy than they initially thought. First Community Bank and Trust has partnerships with 14 fintechs, including Quilo. It was the second bank to take Quilo online. “We want to help people take bites off this revolving debt with fixed-rate, short-term financing,” he said.
Automated lending made profitable
While competition for online installment loans is immense, community bankers can still rely on customers to seek small-dollar financing from them, and it behooves bankers to remain open and receptive to such requests. Cross Keys Bank was receptive when a customer rushed in looking for a fast $5,000. The problem with this particular late-in-the-day request was one of staffing. The person who could process the paperwork had already gone home. Remembering that he’d just signed up for Quilo, the customer pulled out his smartphone while standing in the lobby, branch manager at his side; his loan was funded in three minutes. “He walked out of the bank ecstatic,” recounted Vizard. “It’s not only a tool customers can use themselves, but it solved a problem in the lobby using our own processes.”
“Fundamentally, community banks have a lower cost of funds,” said Fuzayloff, who spent the bulk of his career leading engineering teams at Deutsche Bank, JPMorgan and Goldman Sachs. Community banks can fund small-dollar loans at a rate lower than credit cards, and still earn a net interest margin in the neighborhood of 5 percent, he explained, because Quilo’s entire process, from KYC onboarding to decisioning to disbursement to loan servicing, is done without a human touch. “So it’s not a burden on the community bank; they don’t need to hire an extra person to do that,” Fuzayloff said.
The end-to-end digital process includes marketing and compliance and reporting. At its core, Quilo offers unsecured personal loans, said Shafer, who founded a handful of companies to serve community banks, including Kasasa. Each loan is underwritten using the bank’s standards, with interest rates based on a customer’s credit score, the loan amount and their chosen repayment term. “Each of our clients set their target net interest margin after paying our fee, after charge-offs, after cost of funds, after everything,” Shafer explained. “There is zero chance it’s not ROI.”
The fact that customers can apply, and be approved, for a loan and not have it affect their credit score is important, Vizard said. Taking the loan is the only factor impacting a person’s credit rating.
Introduced in early- to mid-2022, Quilo has about 50 financial institutions on board and is using early-adopter feedback to develop complementary loan syndication to solve for the problem of loan concentration risk which, in one instance, limited its effectiveness (see related article on page 15).
Where are personal finances derailed? It’s the unexpected: Surgery for the injured dog; a root canal and crown for the abscessed molar; new tires for the old car; an e-bike to ease the creak in old knees. “Every day, there are people who leave their homes with no intention of borrowing money,” Shafer said. “Yet when they came home, they had a loan.”
Of consumers who take out personal installment loans to cover these types of expenses, 80 percent had the capacity to use their credit cards but chose not to because installment loans offered them a lower interest rate. By and large, the companies funding these installment loans are not community banks. The trend is to let Google direct the solution.
“McKinsey points out that 30 percent of existing bank customers are borrowing, just not from you,” Shafer said.
Vizard has already moved Quilo toward point-of-sale financing at certain retailers and home improvement stores. Both his and Ohlendorf’s banks limit Quilo loans to $25,000 and place a priority on servicing qualified loan applicants. Ability to repay matters to them as much as ease of funding matters to customers. Quilo connects the dots.
By scanning a QR code at the retailer, pre-approved Quilo customers can complete a transaction and choose their repayment terms all in about 80 seconds.
“It’s really good for the merchant,” Vizard said. “I think there’s great potential.”
And while Ohlendorf’s focus hasn’t yet been aimed at point-of-sale, he admitted the bank has retail customers that want a BNPL-type of offering. “Commercial lending is still our bread-and-butter,” Ohlendorf said. “But we have a nice retail deposit base and we don’t want to ignore them.
“We’re a $207 million community bank, and we can do product and service fintech successfully,” Ohlendorf said. “Fintech is an enabler that allows us to compete. I can’t spin up a product so I chose to partner. It’s a testament that a bank of our size can manage this and other fintech. Quilo gives us an opportunity to compete in this space.”