The way that lenders price and structure financing offers is one of the most significant factors regarding their profitability. The entire balance of a lender’s bottom line is impacted by ensuring they can offer competitive rates while still ensuring they can make money despite losses they may take to financing defaults. These are the bases of risk-based pricing.
While most lenders already implement some level of risk-based financing, there are strategies and tools available to refine and automate the process. This saves time and money and ensures lenders operate as efficiently as possible.
To help business leaders understand risk-based pricing strategies better, we are going to cover:
- The fundamentals of risk-based pricing
- How businesses can implement or improve it
- How to get started
Let’s dive into each and discuss the practical next steps of increasing profitability with risk-based pricing.
Fundamentals of Risk-Based Pricing
All lenders are familiar with basic risk analysis through a credit report. Almost every lender at least uses a tier system of credit scores to decide what interest rate an applicant receives. While this is definitely helpful, true risk-based pricing is more complex and takes more into account than a simple credit score. Banks and lenders that leverage more in-depth analysis often see a noticeable bump in their bottom line as a result.
This involves confirming employment, checking paystubs for income confirmation, and looking closer at the information on the credit report, including:
- Specific payment history
- Debt-to-income ratio
- Debt composition
Even institutions that currently look into all of these details can benefit from automation and more efficient processes. This is because most firms pay underwriters to manually review applicants, which costs extra time and money and takes their attention away from the cases that actually require a human touch. This is where strategies and tools come into play.
How Businesses Can Implement or Improve Risk-Based Financing
The best way for businesses to implement risk-based pricing, or improve their existing system, is to partner with a fintech firm that offers a software lending platform. These software platforms can automate the underwriting process to provide efficiency but also allow for simple configuration and intervention when necessary so that businesses don’t lose out on the flexibility of manual review.
Lenders will always need underwriters, but software automation keeps those underwriters focused on more complex or sub-prime customers, which benefit far more from their intervention. The vast majority of cases can simply be automatically run through the tool based on industry standard pricing or by manual inputs by the leader leveraging it. This is how software lending tools provide both efficiency and flexibility.
The first thing businesses need to do is select a software partner that offers the widest variety of tools and features and the highest quality functionality.
This includes features like:
- Omnichannel functionality to ensure consumers can apply on any platform.
- Near-instant approvals to increase conversion.
- Seamless integrations with other software tools to keep current IT software suites intact.
- Comprehensive analytics so that business owners can monitor the success of their underwriting automation.
- Customizable dashboards so that this information is easily readable at a glance.
Luckily, Skeps’ POS financing platform offers all of these features and more, including embedded lending to get lenders’ products in front of online retail consumers at checkout.
Optimize Risk-Based Lending With Skeps
Skeps offers a comprehensive, end-to-end consumer financing platform that helps lenders get their finance products in front of more warm leads. Working with a vast network of merchants to offer financing at the point of sale, we go above and beyond one-click payment, also offering a one-click application process for any type of financing that an institution chooses to offer, including:
- Installment financing payment plans
- Co-branded credit cards
- Consumer loans and leases
If you’re looking to partner with a forward-thinking fintech company that will increase the reach of a lender, Skeps is the perfect fit.