How Latin American installment lenders vet new borrowers

A market with little credit card adoption might seem like a natural fit for buy now/pay later providers, but only if they can overcome customers’ lack of credit history.

Installment lending has grown substantially over the past year in the U.S., Europe and Australia, where consumers favor the option because it provides a way to make large purchases without adding to their credit card balances. But it’s that very credit card activity that makes it easy for providers to approve the loan at the point of sale.

Atrato, which is based in Mexico City, offers BNPL through Mexican online and brick-and-mortar merchants.

“90% of people in Mexico don’t have credit cards, so BNPL is a very useful payment method here,” said Rogelio Rea, Atrato’s CEO. “We noticed when we started offering BNPL in Mexico that this product resonates very well with Gen Z and young millennials. The problem is that these consumers don’t have enough credit history, so they have a thin credit file.”

Another problem Mexican BNPL lenders face is the very high level of online fraud theft in the country, Rea said.

When Atrato underwrites a borrower, it pulls data from multiple sources beyond just a credit bureau check, and can make a decision in five seconds. One of the most important sources is leveraging the data that the merchant holds on the customer already, said Rea.

“We pull data directly from the merchant’s database such as what sort of products the customer buys and how frequently they shop from that merchant,” he said. “You can determine a consumer’s willingness to pay and the probability of fraud when you see what sort of purchases they are making and with what frequency and at what times.”

To check for fraud, Atrato reviews a borrower’s social media presence to see whether their social media profile is genuine and whether their connections are real.

Customers have to scan a copy of their ID card so that Atrato can detect if it has been forged. It also looks for deviations from standard behavior by legitimate customers such as whether a borrower enters their personal information very quickly. This can be a warning sign, as fraudsters typically copy and paste their information rather than type it out, according to Rea.

“When you correlate the purchase that someone is making with these types of information, you get a lot of insights into a consumer, for example how willing are they to pay their loan,” said Rea.

The Mexican internet group Asociación de Internet MX found that e-commerce fraud including identity theft and cybercrime rose 400% in the country during the 2020 lockdown compared with 2019, according to the El Economista newspaper’s coverage of the data.

“You have to analyze whether a credit report is actually the credit history of your customer and not someone else’s,” said Rea. “If two people in Mexico have identical names, banks can make the mistake of reporting the credit history of one person and assigning it to the other person. Also, someone may have stolen the borrower’s identity and defaulted on loans taken out in their name.”

Atrato starts by underwriting small credit lines, which it upsizes once consumers start to pay off their loans. “As consumers start to grow their BNPL credit line and make their payments, they generate actual credit history with local credit bureaus, which means they increase their access to financial services,” Rea said.

In April Atrato raised $2.7 million in seed capital led by Accel. The funds are to be used to provide 30,000 loans over the next year in Mexico, said Rea.

Currently, none of the BNPL lenders targeting developed markets such as Afterpay, which is based in Australia, or Klarna, which is based in Sweden, offer products in Latin America, leaving the running to startups. Besides Atrato, local providers include Colombia’s ADDI, Latin American e-commerce marketplace MercadoLibre, Mexico’s Kueski, which also offers micro-loans, and Nelo.

Kyle Miller, Nelo’s CEO, said smartphones contain many features that can be used to verify someone’s identity.

“We look at the smartphone’s IP address and location to see if customers are applying for a loan from where they say they are,” he said. “We also do device fingerprinting to see if we’ve seen this device before or if it has been wiped. People will try to defraud you with a device and then wipe the device and try again, so being able to uniquely identify a device is important.”

Like Atrato, Nelo scans a borrower’s ID card. It also checks the applicant’s income and transaction history by using a financial data aggregation service called Belvo, which Miller likened to Plaid.

In April 2021, Nelo, which was founded by two former Uber international growth team executives, Miller and Stephen Hebson, raised $3 million in seed capital led by San Francisco-based Homebrew.

The Latin American BNPL e-commerce market is still in its infancy, although large Latin American brick-and-mortar retailers have offered installment loans in their stores for over 30 years, and installment payments are a popular feature of Brazilian and Mexican credit card programs.

“The growth potential for BNPL in Latin America is massive,” said Jonathan Whittle, founding partner at the emerging-markets fintech investment firm Quona Capital. “Credit card penetration is low, average credit card limits are very low, consumer loans are expensive, and only the largest retailers offer extended payment options to their clients.”

Mexico’s BNPL market saw strong growth in the last year thanks to increased e-commerce penetration, according to Fabrice Serfati, a partner at the Latin American venture capital firm Ignia Partners, and Renata Barroso, an Ignia intern.

Americas Market Intelligence estimates that the Mexican e-commerce market grew by 33% year over year by transactions between 2019 and 2020 and says it is forecast to grow by 32% between 2020 and 2021. Bank transfers for e-commerce purchases will see fastest year-on-year growth in 2021 at 50%, compared with 41% for debit cards, 33% for credit cards, 30% for wallets and 15% for cash-based payment methods, the research firm said.

During Mexico’s Hot Sale week, May 23-31, the equivalent of Black Friday, MercadoLibre saw Mexican purchases using its Mercado Crédito BNPL service rise by 580% compared with the same period of 2020. Mexican users of Mercado Crédito financed over 60,000 purchases each day during the 2021 Hot Sale, said Serfati and Barroso.

Whereas U.S. credit scores contain negative and positive information, Latin American scores are wholly negative, said Nathan Lustig, managing partner at the Latin American VC firm Magma Partners. “Latin American credit scores only show the bad stuff you’ve done, such as missing a payment, but don’t show all the payments you’ve made,” he said.

This means Latin American BNPL lenders have to be creative when underwriting consumers who lack credit history and when checking credit records.

“Acquiring and underwriting consumers requires different approaches in markets where credit bureau data is thin or non-existent,” said Lauren Morton, a partner at the fintech venture capital firm QED Investors. “Latin American BNPL players who are doing this well aren’t simply copying Klarna and Affirm; they’re finding new wedges into consumer behavior.”

Lenders must find some evidence of a borrower’s ability to make recurring payments, Ignia Partners’ Serfati and Barroso said. “By learning from nontraditional variables, you can build an internal scoring model. For example, Kueski deploys big data and machine-learning techniques to analyze users’ credit history, their digital footprint and other online information in order to approve or reject microloan applications for up to $100 in minutes.”

Morton said that great lending companies are inherently great data companies first. “We’re seeing more Latin American BNPL companies leverage bill payment information, cellphone data and payroll to increase approval rates,” she said. “One example is Brazilian secured lender Creditas, which recently launched an online store enabling employees to get low-interest loans on iPhones, electronics and other household goods by securing them with their salary.”

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