The consumer finance industry continues to see a rising share of consumer use of Point-of-Sale (POS) lending and Buy Now, Pay Later (BNPL) purchase financing in the US. According to a consumer survey TransUnion conducted in Q4 2021, 41% of respondents self-reported using this new form of financing within the last twelve months, up five percentage points over a similar survey conducted the previous quarter.1 Rapid consumer adoption of these new forms of purchase financing is generating interest across lenders of all types.
Yet even with over 100 million US consumers having already used POS and BNPL financing, questions persist about the nature of the consumer turning to these new forms of purchase financing. How do the demographics, risk profile, and credit activity of applicants for POS/BNPL financing compare with consumers using other credit products? What are consumers’ motivations for using BNPL/POS and which consumer segments should lenders be targeting?
TransUnion explored these questions in two recent studies, uncovering some interesting insights that could, if incorporated into marketing and underwriting practices, help enhance lending strategies and positively impact lender growth and performance in this sector.
TransUnion conducted a study looking at the credit score, age, wallet profile and other types of loans on file for over 6 million consumers who had applied for POS and BNPL financing over a 6-quarter period between 2019 and 2021. (Unless otherwise specified, we will henceforth refer to BNPL while referring to smaller, more frequent POS lending collectively as POS.)
In the study, we identified POS applicants by looking at the credit report inquiries pulled by POS lenders — meaning the POS applicants studied in our sample were viewed prior to any lender underwriting. The study compared consumer characteristics and credit profiles of these POS applicants to all other consumers with open loans of other product types — the general credit population already underwritten by other lenders.
Our research explores four narratives commonly used to describe the POS consumer. The findings reveal that while some of these narratives hold true, others do not. In fact, we observe a more nuanced view of the POS consumer, creating segments of opportunity for different lenders.
When comparing the age distribution of POS applicants to that of the general credit population, we see POS applicants skew substantially younger. While consumers across all age groups have been using POS financing, nearly 60% of consumers applying for POS financing were 40 years old or younger.
Exploring consumer credit risk across the five VantageScore® risk tiers, we see a materially higher weighting of POS applicants in the higher-risk tiers. In fact, 34% of the POS applicants were already 90+ days delinquent on at least one other loan product at the time the consumer applied for POS financing, which demonstrates why POS lenders are increasingly adopting credit data into their underwriting.
It is important to note, however, that the “POS financing applicants” study group includes all consumers who applied for POS loans, including those riskier applicants who weren’t approved by POS lenders. Regardless, the POS applicant skews higher risk than the general credit population.
The data shows that the POS applicant is actually more likely to have others forms of credit across all credit products except for mortgage, which is expected given the higher concentration of younger consumers we observed above.
While the POS applicant does have good access to other forms of credit, these consumers are likely to have had lower amounts of financing extended to them. For example, the POS applicant has credit lines with their card issuers that are on average around 20% smaller than those of the general credit population.
POS lenders are seizing upon this ~20% average gap in purchase financing available to POS applicants as an opportunity to encourage consumer adoption by helping consumers expand their purchasing capacity. Card issuers, on the other hand, could potentially close out some of the opportunity for POS lenders to attract away existing customers through more robust credit line management in order to better meet their customers’ financing needs.
Despite having lower credit lines, the POS applicant maintains levels of line utilization similar to those of the general credit population. It’s interesting to note that POS applicants have available open-to-buy, but are turning to POS lenders for incremental financing. Clearly, access is not the main driver behind this consumer behavior.
Presumably, POS applicants are choosing not to finance new purchases via existing card relationships to avoid bumping up their utilization levels further, which can lead to lower scores for consumers. These consumers are also likely turning to POS financing to avoid having new charges immediately fall subject to higher APRs on their revolving card balances. (Keep this observation in mind when we look at the Savvy consumer segment further below.)
This narrative appears to hold true, as POS applicants have more hard inquiries on their credit files than those of the general credit consumer population.
Keep in mind that the POS applicant skews significantly younger than the general credit consumer population. Some of the observed hard inquiry activity could be driven by these younger consumers establishing relationships with new lenders and building out their debt wallet.
A separate TransUnion survey of BNPL consumers in Q3 of 20212 explores consumers’ motivation for using BNPL financing. We directly surveyed consumers who reported having used BNPL, and bucketed the responses into groups based on motivation: ultimately revealing four primary consumer segments using BNPL.
Deeper insights into the motivations and credit behaviors of POS financing applicants can enable lenders to identify compelling growth and performance opportunities. TransUnion CreditVision® and alternative credit data can help POS lenders better understand consumers, their behaviors and motivations, and their credit risk for more precise and cost-effective marketing and underwriting strategies. Particularly for those younger consumers with thinner files, leveraging alternative data can help lenders better score these consumers with confidence — such as enhancing approval rates and growing balances without necessarily increasing portfolio risk.
TransUnion’s rich datasets and consumer insights enable lenders to gain a more complete view of the POS consumer behavior and their credit history, define and target specific consumer segments of interest, and refine and improve their acquisition and retention strategies. View our recent blog — Marketing and Underwriting Challenges: How Buy Now, Pay Later and Point-of-Sale Lenders Can Compete More Effectively — to discover new methods POS lenders can deploy to take advantage of these consumer insights to enhance marketing and risk capabilities, while driving growth for themselves and their retail partners.
1 TransUnion Consumer Pulse Survey, November 2021
2 TransUnion Consumer Pulse Survey, August 2021