This blog is the first in a series about point-of-sale financing, discussing how it has grown in popularity, why it impacts credit cards, and whether the industry is positioned for continued traction.
Over the past decade, the consumer finance landscape changed dramatically. Hundreds of new companies have entered the market targeting specific niches, e.g. personal finance management, payments, investments, and lending, unbundling “one-stop shop” services traditionally provided by banks. FinTech lenders have leveraged the latest technology, advanced analytics and richer data assets to disrupt the industry.
Three key strategies have propelled FinTechs forward.
- Digital engagement: FinTechs offer consumers personalized access 24/7, commonly providing credit scores and credit education
- Advanced underwriting: FinTechs use advanced analytics with trended and alternative data to develop a more refined understanding of risk, and risk models are updated regularly given empirical findings
- Lean processes: FinTechs deploy the latest technology to deliver real-time decisioning and rapid fulfillment, enabling consumers to receive funds in hours instead of days or weeks
Armed with these strategies, FinTechs reinvigorated a very traditional product – the personal loan – by delivering a consumer first experience. Often promoting the personal loan for debt consolidation, FinTechs now account for 38% of the personal loan market, up from just 6% in 2014 and 25% in 2016.
As the personal loan continues to grow in popularity, lenders are beginning to extend its application. Many lenders now offer personal loans as an alternative to home equity financing, and others are positioning it as an alternative to auto financing. With personal loan market penetration at just 7% – versus 30% for auto and 63% for card – there appears to be good runway for continued growth in the personal loan sector.
Now, a new breed of company has entered the market, expanding the use of the personal loan to target the initial consumer purchase through point-of-sale financing. This type of financing delivers an instant approval loan offer – either online or in person – that usually happens right before a sale. The length of the loan varies by company, but is typically between 14 days and 96 months.
In the Consumer First Era, individuals want straightforward and predictable repayment terms. In fact, 87% of consumers are interested in a simple way to finance large purchases over time – that’s not a credit card. For consumers, point-of-sale financing provides:
- Instant approval at the point of sale
- Almost immediate funding, either on site or at checkout
- Transparent repayment schedule and financial obligations
The emergence of point-of-sale financing is likely contributing to recent declines in retail card originations. By Q4 2018, newly issued retail cards dropped 5.5% from Q4 2017, representing the ninth straight quarter of yearly decreases.
Lenders are attracted to the lower acquisition costs for point-of-sale lending and the loan performance. Point-of-sale financing is commonly offered for loans with lower charge-offs, such as large purchases, medical and dental, vacation or cosmetic procedures.
For merchants, point-of-sale financing can help grow sales, expand their addressable market, increase average basket size and decrease abandonment rates. Merchants partner with point-of-sale financers to realize these benefits while offloading non-core financing operations and reducing capital requirements.
In the next part of this blog series, we explore point-of-sale financing models and their relationship with retailers. To learn more about how TransUnion can help with point-of-sale financing innovations, fill out the form below.
1 Source: TransUnion consumer credit database
2 Source: Affirm research conducted in partnership with Qualtrics
3 Source: PeerIQ Marketplace Lending Performance Curves: cumulative gross charge-offs as of Q2 2019; life-to-date originations