Getting a jump on the POS financing surge
It is now easier than ever to make large purchases thanks to the emergence of point-of-sale (POS) lending, making it a boon for merchants, fintechs and lenders alike.
POS lending allows consumers to split the cost of large purchases into regular installments and unlike credit cards that have a set credit limit and interest rate, POS loans are determined for each individual purchase usually with lower interest rates than credit cards.
Today it comprises a small fraction of the broader personal loans market but its unsecured lending volume in the US continues to climb. From 8% out of the total $1.15 trillion in outstanding unsecured lending in 2018, it’s expected to reach 11% or $162 billion – in 2021.
Most traditional banks and credit unions are still in the early stages of assessing POS lending strategies, putting them at risk of missing the scale and pace of disruption and the size of the opportunity. While the growing number of POS lenders is good news for consumers, it may not be so positive for traditional banks and other mainstream lenders.
We see four key factors impacting the POS lending segment:
- A shift in consumer and merchant awareness and preferences.
- A broadening market share in smaller ticket purchases and the higher prime segment.
- Increasing competition.
- A role for integration of POS financing into pre-purchase.
Increasing competition is transforming the economics of POS lending. Around 50-60% of loans originated at point of sale are either partially or entirely subsidized by merchants. As POS lenders are starting to partner with smaller merchants, risk models are also changing. For smaller merchants, lenders are now underwriting both the merchant and the consumer. Integrating POS lending into the pre-purchase phase of the consumer journey is now essential. Around 75% of consumers who finance large-ticket purchases decide to do so early in the purchase journey, before the actual purchase. Embedding finance offerings earlier and more directly in the consumer’s purchase journey increases the likelihood of consumer adoption.
Key technology-oriented business models are also emerging in POS financing. To get into POS lending, traditional banks and credit unions can explore a mix of approaches:
- Build: The end-to-end solution model – Financial institutions can opt to build their own end-to-end solution. This involves a large investment in building the product offering themselves and usually lengthens the go-to-market timeline, which is really not an option any more due to the highly competitive nature of this space.
- Buy: The platform-partnership solution – Financial institutions can partner with technology platforms to enable merchant clients to drive sales by offering an end-to-end solution that could include KYC, decisioning, origination, merchant underwriting, disbursing the funds and servicing. This solution lets the partner do the heavy lifting while the financial institution focuses on growing its active or prospective merchant relationships. Most platforms are available in SaaS models with pricing typically including one or all of the components: – (i) a set up or customization fee (ii) a platform license fee (iii) a transaction fee for every loan funded (iv) an unsuccessful fee representing applications which go through the process but finally get declined.
- The marketplace model – This model enables banks to compete in a marketplace of lenders and merchants. Financial institutions can tailor their terms and conditions to remain competitive in the market while gaining easier access to the consumer with little-to-no upfront investment.
There are also POS platforms that are available which have multi-lender waterfall options. Persistent has partnered with FinMkt, a best-in-class loan origination and point of sale (POS) financing SaaS provider to bring multi-lender waterfall POS solutions to financial institutions of all sizes.
Luan Cox, Chief Executive Officer at FinMkt
“The combination of FinMkt and Persistent will provide banks and credit unions with the much-needed technology to compete in the point of sale financing space and to stay relevant, Persistent’s world-class systems integration expertise coupled with FinMkt’s best-of-breed point of sale digital lending technology platform will empower consumers with more and better financing options. So, a win-win for all.”
POS financing presents an alternative lending model to banks and credit unions to grow their lending book quickly. However, those exploring a play in POS financing have a limited period to enter the market and grow in the next 12 to 18 months. Laggards will be unable to compete as most merchants will already have POS financing partners.
The demand for POS financing continues to grow as consumers embrace the same. The question is how fast financial players can get on board to offer the systems needed.
To learn more about our POS Lending solutions with FinMkt.