Though banks are late to the party, I believe they will quickly regain market share for several reasons:
- Cost of funds advantage
- Established merchant relationships
- Ability to weather credit cycles
- Access to technology
Cost of funds advantage
The top 50 banks in the U.S. have access to large balance sheets that are typically funded through cheap consumer checking and saving accounts. As of the week of August 3, 2020, the FDIC stated that the national average savings rate was just .06%.
In comparison, POS direct to consumer FinTech players don’t have access to this same funding source. FinTech’s are typically reliant on the capital markets, commercial lines of credit or whole loan sales to create the liquidity needed to continue to book loans for their balance sheet. These secondary markets have the tendency to dry up during recessionary periods and the overall average cost of funds can be multiples of that of a bank.
If banks have a lower cost of funds, they are likely able to offer more attractive terms to large, top-tier merchants.
Established merchant relationships
Large banks have many long-term relationships with merchants both through the POS credit card programs and through commercial banking relationships. These experienced bankers truly understand the needs of the merchants and their customers and are likely viewed as partners in building great long-term businesses. It is only logical that if all things were equal, large merchants would prefer to choose their existing POS credit card issuer for an extension into POS installment or split pay loans vs. adding a new POS FinTech player.
Ability to weather credit cycles
The verdict is still out on the resiliency of POS installment loans, but what is clear is that banks have been tested time and time again through cycles. Banks live and breathe by their ability to effectively underwrite loans. Weathering credit-cycles is in the DNA of every large bank.
Because of the obsession with credit, banks have been able to continue to lend in the POS financing space even at the bottom of cycles, though credit may tighten. The ability for POS lenders to continue to approve POS loans is critical for merchants as these approvals often lead to higher merchant sales.
Access to Technology
Though banks are clearly behind in the technology race to offer new POS financing options to their merchants, they can catch up fast. In 2020, banks are projected to spend $285B on technology. If needed, the top banks could easily divert tens of millions of dollars to build their own internal infrastructure to originate and service these loans.
Alternatively, banks have the ability to partner with a proven technology provider like Amount. Amount provides white-labeled point-of-sale installment and split pay functionality through end-to-end, cloud-based solutions that empower financial institutions to offer customized financing options to merchants and their customers.
It has been an incredibly fascinating time to watch the POS financing trend develop and to witness first-hand how banks have responded to this new challenge. From my vantage point, it is clear that consumers will continue to demand this product. It is also clear that POS installment loans will continue to displace credit card wallet share at merchants. Banks have core advantages that will allow them to quickly catch-up and ultimately beat direct to consumer POS FinTech lenders. Is your bank ready for the challenge?