Declined applications do not have to be the end of the road. Over the last 18 months, Tabeo tested various options. We found that the most effective one was to propose a different, interest free loan (payment plan). Tabeo can automate risk scoring, payment plans setup and collections for your practice, if you opt for this option.
What to consider?
It's important to explain why a consumer did not qualify for a loan. Otherwise, they'll enquire anyway. That requires good communication skills. Tabeo can automatically show why an application was declined, in real time as part of its flow.
Option 1: why not refer to a friend
Tabeo offers consumers who did not qualify for finance the option to refer the loan application to a friend. In particular, young consumers looking to finance an aligner treatment and applying on mobile found this "path" attractive.
Overall, about 15% of consumers that Tabeo declined take up this option and refer their application to a friend or family member. Of those, about 20% were approved.
Your team is notified as usual and can track offer status in the original application.
Option 2: pay upfront instead
In addition to Option 1, Tabeo allows consumers to pay by card instead. The fee for card payment is 1% + 20p for both credit and debit. We found that consumers with a higher income or those self employed prefer this option. The conversion 'uplift' is about 3-5%.
Your team is notified as usual and can track the payment in the original application.
Option 3: in-house payment plan
A common alternative is for a practice to offer patients a payment plan in-house, if lenders declined the application. You may only offer loans in-house if the payment plan is for up to 12 months with no more than 12 payments. You may not charge the patient a premium, administration fee or interest. This is to stay 'clear' of regulation.
Apart from regulation, you need to track costs and default risk. Direct costs are payment processing, either by direct debit or card. Let's assume the payment costs are 1.0%. We ignore standing orders as it's too manual to keep track of them, even at a smaller scale. Indirect costs is the time your team spends to set up the plan, confirm receipts and chase late payers. For simplicity, let's pretend the indirect costs are zero.
The default risk where the money is. We assume that most patients will pay on time and cover costs in full. The question is how many default. If 1 in 50 patients did default, you should add about 2% 'hidden' costs to your in-house plan.
The patient or portfolio mix is key to the performance of in-house payment plans. If you lend to patients aged 16-34, they're more likely to be declined by lenders given average credit score for this segment, the loss rate will likely be 2-3 higher than for those aged 35+.
In the last recession, the unemployment rate peaked at over 10% for UK consumers aged 16-34. The unemployment rate for those aged 16-24 has already risen from 11% to 16% in the last 6 months (March to September 2020).
Graph 1: unemployment rate in the UK by age
You can significantly reduce the risk of defaults with the simple traffic light system provided by Tabeo. We can automatically verify income and only approve patients who can afford monthly payments and have no adverse credit history.
There is no doubt that practices can increase profit by offering a payment plan to patients who are declined by lenders. The key is to minimise risk and to automate execution and collections.
You can book a demo/call with our team here.