Marketing and Underwriting Challenges: How Buy Now, Pay Later and Point-of-Sale Lenders Compete Effectively

Innovative, new payment options like Buy Now, Pay Later (BNPL) and point-of-sale (POS) financing are becoming increasingly popular with consumers at checkout — due in large part to their low-friction, convenient nature. This holds especially true for Gen Z and Millennials, who accounted for over half of POS financing applicants in a recent study. And with 60% of consumers stating they’re likely to use POS financing in the next 6–12 months,1 many lenders are eager to engage with this substantial, younger consumer cohort.

As lenders explore these new forms of purchase financing, they are finding that POS and BNPL lending does not follow a traditional customer acquisition model. Whereas traditional lenders market to consumers directly via organic digital marketing, lead aggregators and direct mail, POS lenders rely on retailers for consumer access and engagement, and present offers at checkout. While this indirect method can expand reach into transactions and may reduce acquisition costs, it also presents marketing and onboarding challenges POS lenders are looking to address.

Primary challenges faced by POS lenders

1. Limited ability to influence consumer traffic. The indirect nature of POS financing puts lenders in a more passive role, since their origination volumes depend on merchant partners to attract consumers, advance them to checkout and prominently display lenders’ financing offers. With retailers driving consumer engagement and traffic, lenders lose the ability to target specific consumer segments, grow their books proactively and optimize approval rates. This indirect acquisition model, paired with consumers engaging directly with lender apps, provides a unique opportunity for lenders to drive consumer traffic to their merchant partners.
2. Competition for consumer prioritization. Retailers often partner with multiple POS and BNPL lenders, providing consumers various financing alternatives at checkout. But consumers are often more engaged with the retailer or product than the lender financing a purchase, perhaps viewing POS or BNPL lenders as just a means to a desired end. Furthermore, with many consumers using multiple POS and BNPL providers within the same month, lenders are increasingly focused on proactive consumer engagement — not only to foster greater loyalty, but to establish themselves as a top-of-mind financing option, get placed top-of-wallet, and drive regular, repeat usage.
3. Low repeat usage and shorter-term loans inhibit scalability. In addition to expanding purchase financing to more consumers, POS and BNPL financing can also serve as a substitute for credit cards and retail cards — but while major card issuers average around twenty consumer transactions per month, POS and BNPL lenders are still seeing relatively low levels of repeat usage. This can be explained in part by the novelty of these solutions and evolving consumer shopping behaviors. That said, many POS and BNPL loans include terms measured in mere weeks or months — giving lenders little time to establish ongoing consumer relationships, provide new offers, and develop greater customer loyalty.
4. Intense competition for retailer relationships and prioritization. The rapid growth of POS financing — bolstered by new startups, international entrants, retail platforms, and incumbents all entering the sector — has lenders vying for key retailer partnerships and prioritization with consumers at checkout. But retailers, who want all consumers approved with the largest possible offers, are challenging lenders to increase their approval rates and offer sizes. This has lenders looking to enhance their underwriting capabilities so they can better meet retailer objectives while maintaining targeted loan performance.

Lenders can successfully market to consumers despite BNPL and POS lending’s indirect acquisition model

POS and BNPL lenders looking to improve digital consumer engagement and influence consumer usage can now extend firm offers of credit to a retailer’s customer base — tapping into new high-potential audiences — while bringing more value to their merchant partners. TransUnion Prescreen Solutions enable lenders to prescreen their retail partner’s customer base and present firm offers of credit via their retail partner’s digital channels. Lenders can engage directly with a retailer’s customers while directing consumer traffic to the retailer, ultimately driving new consumer transactions for both parties. While maintaining firm control of their credit policy, lenders decide which customers will receive offers — delivered via the retailer’s website or mobile app in the lender’s name. Instead of relying on product placement at checkout, when the cart of the retailer’s customer (order size) is already final, lenders can promote new offers of credit proactively to help retailers grow revenue. 

In addition, lenders aiming to strengthen their brand awareness among consumers, reengage former declines, grow customer relationships, and capture former customers — all via digital channels — can proactively generate and distribute new offers.

TransUnion’s prequalification remarketing solution enables lenders to proactively market new prequalification offers to consumers, which can be used to fund additional purchases with a lender’s retail partners — ultimately encouraging more frequent consumer usage and growing transactions for lenders and retailers alike. Lenders obtain consumer permission to pull their credit files for a full twelve months, enabling them to send these consumers new prequalification offers every month. This form of remarketing transforms the prequalification process from consumer-initiated to lender-initiated, and delivers great value to lenders looking to reengage with former declines and abandons while evolving customer relationships with cross-sell offers. Prequalification remarketing offers even greater promise for POS and BNPL lenders looking to drive repeat usage — with the lender obtaining the consumer’s advance consent to access their credit file over a twelve-month period — overcoming the challenge lenders face in fostering deeper relationships with consumers via shorter-term loans.

Lenders can support their retail partners without taking on more risk

For POS and BNPL lenders, supporting their retail partners’ objectives of optimizing gross sales — which means approving more consumers with larger offers — can result in elevated credit exposure. But in the face of growing competition for key retail partnerships, lenders must strategically balance supporting their partners’ funding objectives with protecting themselves against deteriorating loan performance.  TransUnion’s rich trended credit and alternative datasets offer lenders a more refined understanding of risk in real time, enabling them to approve more consumers and extend larger loans without needing to increase risk exposure. By incorporating traditional and non-traditional credit data — including trended credit and alternative data, as well as verified income and employment data — POS and BNPL lenders can expand their universe of approved consumers and fund larger purchases without having to take on greater risk. By providing POS and BNPL lenders with the right tools, TransUnion is helping this new breed of lender meet merchant partners’ expectations — a strategic imperative in today’s competitive POS/BNPL marketplace — while maintaining targeted loan performance. 

1 McKinsey & Company. (July 2021) Buy now, pay later: Five business models to compete