Owning the entire value chain: Why we built our own credit, analytics & tech stack at Hokodo

Creating value

When we started Hokodo, we had the option to either build an end-to-end value chain in-house or outsource certain aspects to third party providers. We quickly concluded that only by creating each of the key building blocks internally could we guarantee to meet our merchants’ demanding standards on underwriting and tech performance. 

Most of the first year of Hokodo’s existence as a B2B BNPL provider was spent building our tech and analytics stack, which meant that we were in the pre-trading phase for longer than some of our competitors who have chosen to rely on third party solutions. However, far from a disadvantage, we believe this has put us on the front foot from the beginning.

What difference does it make?

Acceptance footprint

There are multiple third party credit scoring vendors. However, relying on one of these providers essentially amounts to outsourcing a huge part of the merchant proposition to a black box. 

By building our own credit and fraud analytics, we can tailor our acceptance footprint to the needs of individual merchants. For example, some of our merchants have large numbers of customers who are recorded in their national register as inactive. Such firms typically get automatically rejected by external vendors. By contrast, Hokodo’s algorithms use a range of factors to distinguish between “concerning” inactives (who we reject) and “benign” inactives whose status is likely the result of a filing error, whom we may accept. 

In this way, we provide the merchant with an offer rate which is materially higher than they could obtain with a provider relying on an external credit vendor.

Use of merchant data

Since we are in full control of our own credit and fraud decisions, we have the ability to use data provided by our merchants in order to improve those decisions. We make use of that flexibility in many different ways including:

1. Reflecting a buyer’s historic payment history with a merchant in order to increase their credit limit or credit availability with Hokodo
2. Using other proprietary merchant data which they share with us (e.g., buyer type) as a factor in credit decisions - which in turn allows us to improve the price/offer rate trade-off to the merchant

By developing our analytics stack entirely in-house, we are therefore able to leverage our merchants’ proprietary data in order to improve the outcomes for them and for their business customers. By contrast, BNPL providers who rely on a third party’s black box credit score have no ability to adjust those credit scores in response to such data. 

Price/offer rate trade off through credit insurance

Because credit limits in B2B can be very large, many trade credit providers, including Hokodo, make use of the insurance industry to take on the risk of these large exposures. This is typically done by purchasing credit insurance. 

Rather than taking an “off-the-shelf” insurance policy from one of the incumbent insurers, we built a mini-insurance company (sometimes known as an MGA or managing general agent) to craft this solution, drawing on insurance capacity from AIG. Why does this matter? It allows us to adjust the insurance cover in order to offer merchants a trade-off between price and offer rate. Merchants can opt for a cheap price which only covers the best buyers, or a higher price to move further down the credit curve (hence increasing the offer rate). 

By contrast, BNPL providers relying on an off-the-shelf insurance solution are constrained by their insurer’s risk appetite. Typically trade credit insurers aim for a 70% acceptance rate with no flexibility around this. 

Latency and uptime

It is unfortunately the case that almost no providers of credit scoring and credit insurance are really set up for the e-commerce world. In particular, many of them have very poor latency (2000-3000+ millisecond response times) and frequent downtime of their platforms due to software upgrades or unplanned outages. One vendor even takes their platform offline every Saturday night for maintenance.

When it comes to technology, a BNPL provider can only be as good as the weakest link in the chain. So, those relying on these legacy providers will have slow response times and high downtime, however good their own technology may be.

By building our own tech and analytics platform, we minimise such dependencies at Hokodo. And where we do require external vendors (for example for some of our raw data providers) we invest in bypass capabilities, which mean that we can still function in the event of outages. In this way we are able to meet the exacting technology standards of our most demanding e-commerce merchants.

Investing in the best

Hokodo’s efforts to build our own value chain from the ground up haven’t gone unnoticed by investors.

“We concluded that the capability and maturity gap between Hokodo and their competitors is enormous,” said Patrick Norris, General Partner at Notion Capital, while discussing why his VC firm doubled down on their support of Hokodo during our series B fundraising round earlier this year.

“Not only are they the only provider to offer pan-European coverage, but they’re the only one owning the end-to-end value chain. As a result Hokodo is the only firm able to deliver a cutting-edge purchasing experience across the continent.”

You’ll notice that Hokodo’s home grown tech stack isn’t the only factor to which Patrick attributes our success – he also highlights the significance of our geographic footprint, which we will discuss in more detail in a future blog post.

Why settle?

Is your B2B Buy Now, Pay Later provider slowing you down? Are they preventing you from offering payment terms to as many buyers as you’d like to? It doesn’t have to be that way.

At Hokodo we’re able to offer a bespoke BNPL solution with maximum uptime, instant decision-making and a user experience that your buyers will love. Book a demo today to find out more.