Underwriting basics: How we evaluate and approve retail partners

April 18, 2019 Swati Vijay

Underwriting a business is complicated and quite different from the underwriting we perform  when reviewing a consumer loan application. This article will give you a look at how Affirm’s underwriting works when evaluating a company.

Affirm’s business underwriting process helps us to determine if a partnership with a specific merchant is the right fit. Other financial institutions use similar factors when businesses apply for loans. Taking a look at "how the sausage is made" can help you set your business up for success.

Below are the six primary factors we consider when evaluating if we can partner with your business to offer Affirm’s pay-over-time options to your customers. Along with these, a business’s overall history influences all these factors and thus our final decision. To fully understand your business and customers, we thoroughly review each of the factors. While we try to respond as quickly as possible, the review may take several days to complete.

1.     Merchant verification

Question we’re trying to answer: Is the business real, is the applicant real, and is there a legitimate connection between them?

The first step is to verify that your business and personnel are real, operating in good faith, and in good standing. This is critical to preventing fraud. We verify business identities by consulting databases like LexisNexis and TLO. We also check if your business  is registered with the Secretary of State and current on its registration fees. An example of fraud in this area is a business operating a fake storefront to obtain fraudulent loans without actually selling any product or services.

2.    Legality of product

Question we’re trying to answer: Is the product legal to sell and legal to finance?

This one is pretty self-explanatory. We cannot finance illegal products, and, due to some regulations, we cannot finance certain legal products. We check the FDA, FTC, and other government policies to ensure we can work with a business.  Additionally, we verify that the business has the correct, required certificates.

3.    Consumer fraud risk

Question we’re trying to answer: Will this business attract fraudsters?

This is the other side of the fraud coin. Instead of impersonating a business, fraudsters often steal a victim's payment instrument (like a credit card) or identity (SNN) to make purchases from real stores but ship the product to themselves.  Some industries tend to attract more consumer fraud than others. Fraudsters often target products with high resale value like expensive watches, electronics, and mobile phones. While operating in one of these industries never disqualifies a merchant for an Affirm partnership, we will be more cautious and aware when approving consumer loans for these businesses.

4.    Disputes

Question we’re trying to answer: Is this merchant at a high risk for disputes? Are they operating in good faith?

A dispute occurs when a product is not fulfilled, arrives not as described, or when a return is not processed correctly. When a dispute occurs, everyone loses. The customer didn’t get the item, the business loses a sale and possibly the product, and we lose a borrower. Merchants most at risk for disputes are off-priced businesses—retailers selling a product for much less than the traditional amount. For example, an ATV merchant selling a product for $500 when it usually costs closer to $3,000 elsewhere. We analyze a company’s payment processor statements from Visa and Mastercard to see how many disputes were filled with their current processors and use that in our decision.

5.    Counterparty

Question we’re trying to answer: What is the risk this merchant will shut down within the year?

To decide if your company is at risk for closure, we look at a business credit report. These are similar to a consumer credit report but for your business. We may also ask for detailed financial documents like a balance sheet and cash flow statements.  

6.    Other things we consider

  • Is your company a brand match?

Affirm is very conscious of only financing products and business that operate in good faith and are consistent with our mission-driven brand.

  • Does your company have short lead times?

We prefer companies that ship products to consumers within 30 days. We don’t want customers making payments on a product they have not yet received.

  • Does your company communicate clear business policies?

We pride ourselves on transparency and want to encourage the same with our merchant partners. Clear policies make for a better customer experience and make it easier to resolve disputes. It’s a win, win, win.

  • What is your company’s social rating?

We want to work with companies that consumers love. We look at Google and Facebook reviews to confirm businesses are developing positive relationships with their communities.

Many of these factors may not surprise you, as they are all good business practices. To set yourself up for the best outcome when applying to work with Affirm, be sure to:

1.  Pay your registration fees to remain in good standing with your respective Secretary of State.

2. Keep your lead times short.

3. Have clear policies, high-quality images, and detailed product descriptions to reduce disputes.

4. Handle disputes well with good customer service.

5. Pay your lines of credit or trade lines on time and avoid  going delinquent.

Working with Affirm is an ongoing partnership, and we value each of our partners. We also frequently monitor each of the factors mentioned above to ensure both sides are getting the best possible results.

 

About the Author

Swati Vijay

I lead the merchant risk team at Affirm. Prior to working at Affirm I have worked at various risk management roles over 12 years in American Express, PayPal and Intuit.

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