The Return of Point-Of-Sale Lending
Point-of-sales loans have been around for decades, offered by banks to be used towards big expenses, such as in furniture stores and at the orthodontist. Now, they are increasing in popularity and consumers have been choosing to borrow at checkout, instead of financing purchases such as electronics and home improvements with a credit card.
More millennials have been uncomfortable carrying credit card balances, due to the 2008 financial crisis, and they have been choosing the repayment of installment loans instead. These borrowings are usually with an initial 0% interest rate and tech startups are exploring the market with innovative techniques to issue and approve them.
Lately, millennials have been driving market’s demand and they dislike the big banks – the Federal Reserve Bank of St. Louis, in the U.S., stated that millennials between the ages 20 of35 have one third less credit-card debt than the same age group had in 2001. They are, however, willing to borrow for a fixed amount of time for some purchases, including cars and phones.
Other entities have also been jumping on the point-of-sales loans bandwagon: Citizens Financial Group, for example, gives instalment loans to customers upgrading their iPhones at Apple stores. Their portfolio for financing loans has grown from $700m to $1.2bn in the past year. TransUnion studies observed that personal-loan balances in America are higher (18%) than credit-card debt (6%).
The benefit of point-of-sales loans is that borrowers tend to pay less overall because there aren’t any hidden fees or compound interest in the money that they borrow. They also have a set pay-off date. Merchants also benefit, as the loans help them sell more goods and services.
Point-of-sale lending is currently done in various ways. Affirm, a US based online lender, has made a name for itself with simple borrowing terms and partnerships with high-end brands. They currently have agreements with 1,500 online retailers and they noticed that merchants using their services experience a revenue increase of 7-12%, because the shopping baskets are bigger, and items are less likely to be abandoned at checkout.
Some companies like Lending Club and OnDeck Capital are using a peer-to-peer lending model. Their stocks experienced a gradual decline after their initial IPO, which was attributed to high sales-and-marketing costs and difficulty finding cheap and stable funding for loans. Other companies, such as Green Sky, hope to fare better by matching merchants with banks and making money by charging fees to both sides.
In the Canadian landscape, PayBright also implements point-of-sale lending, financing customers’ purchases in areas such as healthcare, retail, home improvement, sports and fitness equipment. They aim to help Canadian merchants build successful businesses, while helping customers break down the cost of expensive purchases into a series of affordable monthly installments.
Tech startups are reviving point-of-sale lending. https://www.economist.com/finance-and-economics/2018/08/04/tech-startups-are-reviving-point-of-sale-lending
Why point-of-sale lending is hot right now. https://www.americanbanker.com/news/why-point-of-sale-lending-is-hot-right-now
PayBright’s website. https://paybright.com/for-customers/
GreenSky’s website. https://www.greensky.com/my-loan/