This blog is the second 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. Read part one here.
In my first blog, I outlined the emergence of point-of-sale financing due to evolving consumer preferences and the appeal of fixed and transparent loan repayment. Point-of-sale financing targets the initial consumer purchase and delivers an instantly approved loan offer – either online or in person – that usually happens right before a sale. Lenders are increasingly focused on this type of financing, which offers lower acquisition costs and the potential for superior loan performance. Retailers are also adopting point-of-sale financing as they seek larger and more frequent consumer purchases.
Now, we’ll explore the different point-of-sale financing models and how they work with retailers. Let’s look at the three financing models companies use: merchant processor, lending and point-of-sale-as-a-service.
Merchant processor model
The first type of financing model is the merchant processor, in which the consumer is not explicitly charged interest. Instead, the retailer pays a fee to the financer for enabling additional or larger consumer purchases.
With the merchant processor model, the consumer typically pays a portion of the purchase price to the retailer at the time of purchase. The merchant processor — the financer — provides accelerated payment to the merchant for the remaining balance, referred to as a merchant discount rate. The consumer receives possession of the purchased items at checkout and then makes payments to the merchant processor for the remaining purchase price. Klarna, QuadPay, and Sezzle are examples of companies that deliver this type of purchase financing.
A common merchant processor approach involves the consumer paying 25% of the purchase price at checkout. The consumer then pays the remaining 75% in fixed payments over a period of weeks or months, depending on the purchase amount.
Merchant processors typically generate revenue through merchant discount rates, ACH and late fees, and interchange fees from virtual cards. On the risk side, the merchant processor holds the fraud and credit risk, and may need to maintain a minimum approval rate.
In this model, lenders partner with retailers to present offers to consumers at checkout. The consumer selects a lender’s offer at checkout, and the lender underwrites and originates the loan to the consumer.
Consumers receive purchase financing in amounts ranging from hundreds to tens of thousands of dollars, with some lenders financing only the purchase at-hand and others providing additional financing for future purchases. Typically, no down payment is required at checkout. Financing is broadly available through fixed term loans or lines of credit, depending on the provider, and consumers pay interest for the borrowed funds.
Many online and brick and mortar merchants across fashion, travel, home, electronics and auto use this type of model to increase retail revenue. Affirm, Bread, and Uplift are well-established providers of this type of purchase financing.
The revenue model for point-of-sale lenders usually consists of interest income, transaction fees, ACH and late fees, and interchange fees from virtual card. Some lenders are also able to obtain merchant discount rates, albeit at lower levels than merchant processors.
In this case, the lender has the fraud and credit risk. With increasing competition for consumer purchase financing referrals, retailers are beginning to request minimum consumer approval rates from these lenders vying for their attention.
The point-of-sale platform model enables multiple lenders to present offers simultaneously to consumers at the point of purchase. In this model, multiple lenders connect into a platform to present offers to individual consumers. Consumers receive multiple offers in one place and can choose which offer best meets their needs from the lenders that partnered with the point-of-sale platform.
Lenders benefit from a turnkey solution that enables them to launch a new product and gain access to new consumers, while avoiding incremental technology investment. Home improvement, elective medical procedure, and furniture financing are common examples of this model. ChargeAfter, Greensky, and Wisetack are some providers of these platforms.
The platform’s revenue model is a combination of merchant and lender transaction fees, servicing fees, ACH and late fees, and interchange fees from virtual cards.
Each lender bears the chargeback risk for the loans they originate through the platform. In addition to maintaining approval rates for retail partners, participating lenders need to generate offers that stand out in order to convert consumers.
In my next blog, I’ll discuss product design considerations, new fraud risks introduced by point-of-sale financing, and how point-of-sale financers can best position themselves to establish and protect their retailer partnerships. To learn more about how TransUnion can help with point-of-sale financing innovations, fill out the form below.