Voice of the Industry

Checkout lending – real time scoring for online merchants

Tuesday 19 June 2018 00:16 CET | Voice of the industry

Miriam Wohlfarth, RatePAY, explains why checkout lending is becoming popular for online merchants and what products and customers are suited for it

Before checkout lending was introduced for online retail in 2009, this payment option was the sole domain of large mail order companies and banks in the form of conventional sales financing. Our vision was to offer checkout lending without leaving the world of ecommerce. It was for this reason that we founded RatePAY. All customers, offline and online alike, should have the option of paying in instalments that have been specifically tailored to their personal financial situations.

Racking up debts is part and parcel of everyday life for many modern consumers. A recent GfK survey has revealed that one in three Germans made use of financing options in 2017, while one in four opted for instalment credit. It is not only cars and other high-value consumer durables that are financed in this way, but also daily essentials.

This means that checkout lending is becoming ever more interesting for online merchants, particularly as so many people also pay for insurance policies and season tickets in several instalments or make use of 0% finance in high street retail.

Exceptions for online retail: checkout lending vs. instalment credit

On the internet, people speak about payment by instalments as opposed to the term instalment credit that is used in high street retail. Instalment credit represents a class of consumer loan that is granted by the high street merchant to a bank. This entails terms and conditions which in reality would make instalment credit unfeasible in online retail circles. Buyer must personally sign a loan application and prove their identity. This need to obtain signatures results in a disruptive effect which no online merchant can afford. After all, customers want fast, simple and convenient payments, otherwise they may abandon the purchase.

The solution to this is checkout lending. Merchants and customers agree only that the sum total can be paid off in instalment payments within a set timeframe. This process can be agreed informally online.

The rise of checkout lending

According to a current ECC survey, 27% of all online merchants in Germany offer their customers the opportunity to pay in instalments. In 2015, it was 24% of online merchants, meaning a slight rise has been recorded here. Of the 27%, 16.6% of merchants offer checkout lending secured via a service provider such as RatePAY or Affirm; 10.5% manage this themselves.

In total, 1.7% of online consumers chose checkout lending for their last online order. For merchants, the appeal of checkout lending is, above all, based on offering their customers an additional service. Payment by instalments in general is very popular with consumers: 94.2% of German consumers are familiar with this payment option, as opposed to 90.6% in Austria and 80.4% in Switzerland.

What type of products and customers are suited for checkout lending?

Many merchants fear that their product range and low average shopping bag values mean their business is unsuitable for checkout lending. However, a survey from 2015 revealed that online shopping bag totals paid off via checkout lending often amount to somewhere as little as between EUR 300 and EUR 1,000. These amounts can therefore not be settled via consumer loans, which tend to be of much higher values.

Four in ten online merchants believe that checkout lending attracts the wrong kind of customers. However, shop operators are always in control of which customers are offered this payment option, and of the quality of risk assessment processes. Our experience tells us that customers often choose checkout lending because they appreciate flexibility in terms of their liquidity and not because they have no money.

A recent survey which collected data on the payment types favoured by German consumers has revealed that it is parents and young families who are primarily most interested in checkout lending. The survey has also shown that 13% of online shoppers would really appreciate the option of paying in instalments in online shops.

Machine learning drives retail results

In terms of unsecured payment types such as checkout lending, whereby merchants that do it by themselves and not by a third party, bear the costs upfront, professional real-time risk assessments are of paramount importance. Even major merchants rely on external specialists for credit checks, in order to ensure that acceptance rates are as high as possible with default risk kept as low as possible. Service providers can generally make use of significantly more parameters and credit agencies than merchants who process checkout lending on their own.

The technical progress on the part of service providers is set to increase further in future: recently, some checkout lending providers have started to conduct risk assessments based on machine learning which allow decisions to be taken even more quickly and reliably. Loan approvals can be granted in no time at all, meaning consumers enjoy a seamless, uninterrupted and pleasant purchase experience. 

Conclusion: checkout lending as a service tool

Payment by checkout lending is in demand among buyers and allows merchants to attract new customers. This can also be seen by the fact that major payment market players such as PayPal are now also offering checkout lending in their portfolios. Merchants who shy away from the relatively high default risk which checkout lending entails are easily able to avoid this by outsourcing processing for this payment option to a payment service provider using the state-of-the-art technology such as machine learning in order to keep the default ratio to a minimum.

Studies and experience have shown that after integrating the checkout lending option, merchants increased sales, improved customer satisfaction and gained new customers. Moreover, both the average shopping bag value of an order and the conversion rate were increased at more than half of the merchants investigated.

Online checkout lending as a tool for customer retention: customers value the opportunity to pay by instalment as a form of value added from online merchants, especially as this payment option is not any more expensive than conventional sales financing.

About Miriam Wohlfarth

Miriam Wohlfarth is Managing Director and founder of RatePAY GmbH and is responsible for innovation, marketing and sales. With more than 18 years of experience in online payment and sales, she has been worked at Ogone (Ingenico Payment Services), Royal Bank of Scotland (RBS) and its payment services subsidiary Bibit.

 About RatePAY

RatePAY provides payment solutions with a full payment guarantee in the DACH region. They include invoicing, instalment payments with real-time online approval, direct debit and pre-payment. RatePAY GmbH, headquartered in Berlin, was founded in December 2009, has 160 employees and is a portfolio company of Advent and Bain Capital.


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Keywords: RatePAY, Miriam Wohlfarth, checkout lending, merchant, instalment credit, Affirm, Germany, PayPal, machine learning, retail
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Countries: World

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