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Exploring the Rise of Point-of-Sale Financing – Part 3

John Wirth
Blog Post09/01/2020
Business Credit Trends and Reporting
Exploring the Rise of Point-of-Sale Financing – Part 3

This blog is the third 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 and part two.

In my second point-of-sale financing blog, I outlined how lenders work with retailers on point-of-sale financing and the three models that companies use. Now, we’ll explore the ways lenders offer these loans to consumers and how point-of-sale can meet retailers’ needs.

How lenders are using different point-of-sale loan configurations

As we’ve discussed, point-of-sale providers combine the strengths of personal loans and credit cards to target the initial consumer transactions. Lenders offer point-of-sale financing as an alternative to credit cards to meet the evolving preferences and needs of consumers. They may receive a smaller credit line than they need from their card issuers, have concerns about a negative score impact following high utilization or dislike the uncertain repayment amounts and timing of card balances.

We are observing lots of product innovation in point-of-sale financing, which fall into four product configurations:

Installment loan: Originated at purchase, lenders provide a personal loan, typically just for the purchase price. A new personal loan is opened for each additional purchase. These loans are offered to consumers across the risk spectrum with transaction sizes varying from $50 for consumer retail purchases to $100,000 for home improvement financing.

Line of credit: Lenders offer a line of credit with draws for each purchase or purchase period. The initial line is determined at origination and then evaluated regularly as a consumer looks to finance new purchases. While there is diverse application of the line of credit, point-of-sale financers often provide lines of credit to riskier consumers with frequent, low-dollar transactions.

Line of credit with draws as personal loans: Lenders report this type of financing as a line of credit, but present it to the consumer as personal loans for each purchase or each period. For each consumer purchase, the lender presents the consumer with a fixed repayment schedule for the amount borrowed to make that purchase. If a consumer becomes delinquent on a transaction, the lender treats the amount in arrears as a line of credit. This offering focuses on subprime and near prime consumers making frequent, small-dollar transactions.

Amortized line of credit: Lenders offer a line of credit with a defined draw period. The total amount drawn is then amortized over a fixed schedule with initial line and adjustments are determined throughout the draw period. Once the draw period has expired, the total amount drawn is amortized over a fixed repayment schedule. Lenders offer these loans mostly to near prime and prime consumers with variable transaction sizes and frequency.

Point-of-sale lenders are introducing different product design components within these four configurations. While point-of-sale financiers mostly use compound interest, some use simple interest to provide a clearer repayment schedule to consumers. Compound interest may become a factor if a consumer becomes delinquent. Many of the merchant processors do not provide an explicit rate, as the retailer covers the financing costs for the consumer via the merchant discount rate they pay to the lender.   

Considering the breadth of innovation taking place across the point-of-sale sector today, there are some products in the market today that do not fit nicely into Metro2 reporting guidelines.  Point-of-sale lenders first need to ensure that their customers understand their repayment obligations and timing, which some lenders even allow consumers to configure themselves.  Lenders may need to provide consumers with clarification on differences in the initial and updated repayment schedules due to late payment, penalties, deferred payments or forbearance. Providing this guidance to consumers will help lenders continue to innovate around new point-of-sale solutions, while delivering to consumers the clarity and predictability they seek from their purchase financing provider.

In my next blog, I’ll discuss some of the issues point-of-sale lenders face with their retailer-driven acquisition models and achieving balance between their objectives and retailer priorities. I’ll also highlight fraud risks specific to point-of-sale lending and the strategies and approaches point-of-sale lenders can adopt to combat fraud.

To learn more about how TransUnion can help with point-of-sale financing innovations, fill out the form below.

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