By late 2019, unsecured lending had hit new highs, thanks in part to a surge in point-of-sale financing as consumers and businesses alike became more aware of it as a purchase option — in turn a result of better and more user-friendly lending technology, and increasing competition from online and walk-in retailers alike.
In 2018, outstanding balances in the US initiated through POS financing came to around $94 billion, representing a two-year compound annual growth rate of 24%, according to the consulting firm McKinsey — which last year predicted POS-originated purchases would top $162 billion by 2021 for further CAGR hike of 20%.
And of course that was before the coronavirus pandemic shredded short- and medium-term financial forecasts for businesses and households alike. We’ve also collected the five key reasons to consider POS financing for retailers in a recent blog post.
“If anything, retailers and other product and service providers are keener now than they were pre-Covid to attract customers and encourage sales by providing quick, low-risk installment loans to fund purchases — and not just on big-ticket items,” says Elena Ionenko, co-founder and business-development head of loan-servicing software maker TurnKey Lender. “That said, businesses considering adding POS-purchasing options should take a strategic approach, one that presupposes some familiarity with the different business models that can support such lending.”
All the reasons why
Besides the spur of shutdowns this year, the recent rise in POS financing is attributable to several principal factors, according to Ionenko.
- Public awareness: As mentioned, consumers and retailers are gaining awareness of the financing possibilities of POS, especially for goods with large and mid-level price tags.
- Convenience: Loan applications are processed prior to actual sales, either at the checkout using a mobile device, or as a quick preliminary step in making online purchases.
- Fintech innovation: Publishers of POS-financing software have streamlined origination and other processes by means of artificial intelligence, dynamic evaluation models, and automated oversight and management features.
- Credit-Card fatigue: Young consumers (many struggling to repay student loans) tend to be more suspicious and hostile toward credit cards than their elders.
But, adds Ionenko, just as would-be lenders should understand the catalysts for the rise of POS financing, they should be conversant with the five main business models that underpin retail and other business approaches to this form of lending. Those are:
- Balance-sheet rental. In this model, the POS financier partners with an established lender — usually a bank or a fintech — to originate loans. This is often the cheapest option, but it provides limited access to customers through the life of the loan, making it less user friendly in the most fundamental sense.
- Joining an “ecosystem.” In this version, the POS sponsor — whether its a retailer, a car lot, or a medical practice — taps into an online marketplace featuring multiple firms with experience in POS lending, This version tends to yield more control over approval criteria, higher approval rates, and less “integration fatigue” — again though, post-approval touchpoints with customers may be limited.
- Credit-card program innovation. Remember the credit-card fatigue we mentioned earlier? Another wrinkle on outsourcing to support POS financing depends on working with a card issuer to carve out lower-interest installment loans for existing card accounts as a way to attract more installment buyers.
- Going all-in. This one is far-fetched for most businesses that aren’t already, say, banks. The idea is to become a fintech in one’s own right — an undertaking that calls for considerable technological — and probably tech-marketing — know-how.
- Renting the technology. Businesses can subscribe to pre-existing POS-lending platforms, sparing themselves the toil and expense of investing in proprietary lending infrastructure. The rub here is finding the right technology partner.
The case for renting
For Ionenko, renting the tech — that is, going for an in-house POS solution enabled by a specialist lending-platform provider makes the most sense. Among the advantages she cites:
- Better data integrity and security. Client data is kept between your business and its customers with no third-party involvement. This enhances confidentiality — a boon to many businesses, including medical practices. This also diminishes the risk of customers getting poached by competitors introduced to them by third-party lenders.
- Higher conversion rates. For customers, an in-house solution backed by a dedicated lending-tech maker can make the process of applying for and securing a POS loan nearly as fast and easy as making a payment at a cash register — an innovation that reduces purchase abandonment.
- Proprietary underwriting. If a business wants to set its own criteria for credit decisions, and wants to provide more flexibility around approvals, in-house rules can help ensure that its interest rates are calibrated to balance policies and risk aversion with profitability and enhanced customer relations.
- Access to transactional data to increase fast and smart decisions through artificial intelligence, and to optimize portfolio yield with technology that helps retailers the business identify profitable customers for more favorable terms or other relationship-building incentives.
- Reducing (or eliminating) transaction fees otherwise payable to a third-party lender (which can be as high as 15%).Secure, encrypted apps ensure safe functionality at any location there’s wifi or mobile-data availability.
- Improved brand loyalty. With fully-supported white-label technology, a business doesn’t have to worry about its customers getting confused by third-party documentation — or losing such a vital touch point to make inroads in long-term relationship building.
“Retailers remain under acute pressure from the coronavirus pandemic and measures taken to prevent its spread against a darkening economic backdrop,” says TurnKey Lender’s Ionenko. “Giving customers a choice to fund purchases over time through POS installment financing can reduce ticket shock, build loyalty and help close sales.”
TurnKey Lender solution for retailers
TurnKey Lender’s Retail Solution allows anyone to provide instant financing to customers to quickly grow new business. With an intuitive user interface and a proprietary AI-powered Decision Engine, you get the lowest possible credit risks with the biggest potential growth spread.
The cloud-based platform incorporates retailers’ order processing automation, flexible business logic, and customer portal in a single, integrated solution. The entire financing process is 100% automated.
- Customers apply from your website or an in-store kiosk.
- The Platform automatically pulls customer data from credit bureaus, bank statements, and other sources, and suggests a credit decision based on your unique business rules.
- The system either automatically decisions the financing or presents it to your underwriter for review.
- Funds are sent to the vendor once the transaction is complete and the financing is executed.
- The Customer Portal allows customers to easily manage existing financing, make payments, submit documents, track statuses, and apply for additional financing without reentering their data.
Businesses in over 50 countries use TurnKey Lender to:
- Grow their customers’ lifetime value and stand out from competitors with affordable and easy-to-use financing options.
- Have an unmatched time-to-market for any new promo campaigns or financing options.
- Increase the average order size while offering competitive rates.
- Stabilize cash flow to account for retail seasonality.
- Build customer loyalty and ensure repeat business.
In preparing to implement POS financing, however, Ionenko concludes that “businesses should ask themselves if they’re better served by outsourcing the program, or engaging a lending-tech vendor with a view to retaining more control of its customer-centric purchases options.”
If you would like to discuss how to add embedding digital lending into your operation, don’t hesitate to reach out to our team at [email protected] and our team will be happy to answer any and all of your questions!