Point-of-Sale Financing: The Next Generation of Unsecured Lending

July 20 , 2020

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Generations of digital natives are finding new ways to buy-now and pay-later. Consumers have no shortage of financing options at their fingertips as e-commerce continues to evolve. Are banks responding? 

There are few spaces that empower consumers more than the online shopping cart. Tailoring a shopping experience to your desires, purchasing the products you need with a click of a button while quickly financing items has become a must-have for digital shoppers. As these new generations of consumers rely on new channels of unsecured lending, point-of-sale financing has become a boon for merchants, fintechs, and lenders alike. 

So why is point-of-sale-financing garnering so much attention right now? Let’s take a look.

What is point-of-sale financing?

Point-of-sale financing enables consumers to break up payments for certain items over a period of time. Merchants provide a way to purchase a product now while the consumer pays for the product over a period of time determined by the lender. Lending at the point-of-sale is also known as open-loop brand credit cards, closed-loop store credit cards, and retail installment loans.

Growing demand for this type of unsecured lending coupled with the growth in e-commerce purchasing over the last two decades has created an opportunity for financial institutions. Filene Research Institute estimates the total point-of-sale financing market at $391 billion, equating to approximately 3.5% of annual consumer spending. 

How Point-of-Sale Financing Works

Point-of-sale financing holds unique value for consumers, lenders, and merchants alike.  Cloud-based solutions empower merchants to offer customized financing options for purchases both online and in-store.

How it works

  • The consumer selects financing options while finalizing the purchase.
  • The consumer’s information is securely passed from the merchant to the lender for loan decisioning.
  • A decision is made by the lender and the consumer is presented with options for point-of-sale financing on their purchase.
  • The consumer chooses the financing terms that are right for them and purchases the item. 

Pretty simple, isn’t it? Now that we’ve uncovered how point-of-sale financing works, let’s dive deeper into why it makes sense for lenders and merchants to implement a solution for their customers now.

Data Drives Demand

The most compelling reason to implement a point-of-sale financing solution lies in its promise to deliver for future generations of borrowers. As the technology continues to adapt to better purchasing processes, application user experiences, and evolving e-commerce business models, the demand for this type of lending is clear already. 

According to McKinsey Consumer Finance pools, outstanding balances on point-of-sale financing nearly doubled from $49 billion in 2015 to $94 billion in 2018 and is expected to reach upwards of $160 billion in 2021. The channel currently accounts for nearly 10% of all unsecured lending and is growing at an unprecedented rate. 

Market Factors

2020 has seen a number of point-of-sale financing related partnerships and entries into the market. From AliPay announcing its minority stake in Klarna to Shopify announcing its foray into installment payments, the market has decided: point-of-sale financing is here to stay and will continue to shape unsecured lending for years to come. 

 point-of-sale-financing-growthSource: McKinsey

Consumer behavior tells the most important market factor driving point-of-sale financing’s rise. Filene Research Institute asserts that nearly 20% of millennials expect to draw or increase unsecured lines of credit for renovation/repair products and 13% of millennials will take on additional debt for electronics over the next few years. Consequently, there is increasing interest in unsecured lending options, whereas more common lending types like auto and home loans rank far lower on the priority list for younger generations.

Generations Y and Z are emerging as a major market consumer for point-of-sale financing, further proving the future-proof opportunity here. These cohorts are familiar with credit from an early age due to the subscription economy they have grown up in. The need is there too. The annual salary of millennials is approximately 20% lower than that of the baby boomer generation when they were the same age, after adjusting for inflation. Net worth of Americans ages 18 to 35 has decreased by 34% since 1996. These consumer factors make point-of-sale financing a must-have for banks in their unsecured lending playbook.

Point-of-sale financing for banks, credit unions, and financial institutions

“Fintech is eating the world,” opined Forbes contributor Alex Lazarow in mid-2019. This sentiment is true now more than ever as we head into the second half of 2020. E-commerce giants like Alibaba and Shopify are growing their offerings and proving to be a viable challenger to banks, credit unions, and financial institutions across the globe. 

In November 2019, McKinsey asserted that “traditional players exploring a play in POS financing have a limited period to enter the market and grow. In 18 to 24 months, laggards either will be unable to compete, because most merchants will already have POS financing partners, or will need to pay a heavy premium to get into the market.”

So how can your financial institution thrive in this growing market? Let’s identify the three business models that financial institutions are employing today:

Build: The end-to-end solution model

Financial institutions can opt to build their own end-to-end solution for point-of-sale financing. This involves a large investment in building the product offering themselves and usually lengthens the go-to-market timeline, which could prove even more costly in such a burgeoning segment of unsecured lending.

Buy: The platform-partnership solution

Financial institutions can partner with technology platforms to enable merchant clients to drive sales by offering an end-to-end solution that could include decisioning, verification, origination, and servicing. This solution lets the partner do the heavy lifting while allowing financial institutions to focus on growing their active or prospective merchant relationships.

The marketplace model

This model enables banks to compete in a marketplace of lenders and merchants. Financial institutions can tailor their terms and conditions to remain competitive in the market while gaining easier access to the consumer with little-to-no upfront investment.

What is the right solution for my financial institution?

The growing demand for point-of-sale financing is clear and present. While the long-term trajectory of the unsecured lending product remains somewhat unknown, the same principles that have guided banks for decades apply. Tailoring your point-of-sale solution to your risk profile has never been easier with multitudes of options in-market. Mitigating the fraud that continuously impacts banks remains a challenge for those entering the point-of-sale arena.

In order to understand which type of solution is right, every bank and financial institution should start by asking the following questions:

  • Is your bank or financial institution more focused on customer experience or growing the balance sheet?
  • What type of investment is your bank or financial institution willing to make? Building a program in-house could cost upwards of $20 million as an up-front investment.
  • When does your bank or financial institution want to go-to-market? Some builds can take longer than two years, whereas most partnerships can go-to-market in a matter of months. 

Consumers demand more than just a slick interface. Financial institutions require an enterprise-grade solution that combines an orchestrated front-end with back-end intelligent decisioning tools, enabling on-the-fly fraud verification and servicing tools to provide a seamless user experience. These broader demands coupled with a need for limited up-front investment and speed-to-market make Amount Pay the enterprise solution for leading banks and financial institutions.

Amount Pay is an end-to-end, cloud-based solution that empowers financial institutions and merchants to offer customized financing options to consumers. Backed by the power of Amount 360, the omnichannel solution provides the freedom to apply from the web, mobile app, in-store, or over the phone. Leverage a powerful originations engine with quick approvals for fixed-rate loans with 12 to 72 month term lengths. Improve merchant client relationships, e-commerce user experiences, and boost sales. 

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Footnotes

The information in this post is provided for informational and advertising purposes only. Amount's service may vary for each customer. For more information, email us – brand@amount.com.

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John Thomas Lang

JT combines a business mind with a creative soul as Head of Marketing at Amount. JT's passion for brand, content, and funnel optimization has played a key role in scaling multiple award-winning tech startups in Chicago. A proud Colorado native, you can find him digging through the crates for vinyl records or nerding out on SABR analytics.

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Point-of-Sale Financing: The Next Generation of Unsecured Lending

Posted by John Thomas Lang on July 20 , 2020
John Thomas Lang
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Generations of digital natives are finding new ways to buy-now, pay-later. Consumers have no shortage of financing options at their fingertips as e-commerce continues to evolve. Are banks responding?

 

There are few spaces that empower consumers more than the online shopping cart. Tailoring a shopping experience to your desires, purchasing the products you need with a click of a button, and quickly financing items has become a must-have for digital shoppers. As these new generations of consumers rely on new channels of unsecured lending, point-of-sale financing has become a boon for merchants, fintechs, and lenders alike.

 

So why is point-of-sale-financing garnering so much attention right now? Let’s take a look.

What is point-of-sale financing?

Point-of-sale financing enables consumers to break up payments for certain items over a period of time. Merchants provide a way to purchase a product now while the consumer pays for the product over a period of time determined by the lender. Lending at the point-of-sale is also known as open-loop brand credit cards, closed-loop store credit cards, and retail installment loans.

 

Growing demand for this type of unsecured lending coupled with the growth in e-commerce purchasing over the last two decades has created an opportunity for financial institutions. Filene Research Institute estimates the total point-of-sale financing market at $391 billion, equating to approximately 3.5% of annual consumer spending.

How Point-of-Sale Financing Works

Point-of-sale financing holds unique value for consumers, lenders, and merchants alike. Cloud-based solutions empower merchants to offer customized financing options for purchases both online and in-store.

How it works

  1. The consumer selects financing options while finalizing the purchase.
  2. The consumer’s information is securely passed from the merchant to the lender for loan decisioning.
  3. A decision is made by the lender and the consumer is presented with options for point-of-sale financing on their purchase.
  4. The consumer chooses the financing terms that are right for them and purchases the item.

Pretty simple, isn’t it? Now that we’ve uncovered how point-of-sale financing works, let’s dive deeper into why it makes sense for lenders and merchants to implement a solution for their customers now.

Data Drives Demand

The most compelling reason to implement a point-of-sale financing solution lies in its promise to deliver for future generations of borrowers. As the technology continues to adapt to better purchasing processes, application user experiences, and evolving e-commerce business models, the demand for this type of lending is clear already.

According to McKinsey Consumer Finance pools, outstanding balances on point-of-sale financing nearly doubled from $49 billion in 2015 to $94 billion in 2018 and is expected to reach upwards of $160 billion in 2021. The channel currently accounts for nearly 10% of all unsecured lending and is growing at an unprecedented rate.

Market Factors

2020 has seen a number of point-of-sale financing related partnerships and entries into the market. From AliPay announcing its minority stake in Klarna to Shopify announcing its foray into installment payments, the market has decided: point-of-sale financing is here to stay and will continue to shape unsecured lending for years to come.

Source: McKinsey

Consumer behavior tells the most important market factor driving point-of-sale financing’s rise. Filene Research Institute asserts that nearly 20% of millennials expect to draw or increase unsecured lines of credit for renovation/repair products and 13% of millennials will take on additional debt for electronics over the next few years. Consequently, there is increasing interest in unsecured lending options, whereas more common lending types like auto and home loans rank far lower on the priority list for younger generations.

Generations Y and Z are emerging as a major market consumer for point-of-sale financing, further proving the future-proof opportunity here. These cohorts are familiar with credit from an early age due to the subscription economy they have grown up in. The need is there too. The annual salary of millennials is approximately 20% lower than that of the baby boomer generation when they were the same age, after adjusting for inflation. Net worth of Americans ages 18 to 35 has decreased by 34% since 1996. These consumer factors make point-of-sale financing a must-have for banks in their unsecured lending playbook.

Point-of-sale financing for banks, credit unions, and financial institutions

“Fintech is eating the world,” opined Forbes contributor Alex Lazarow in mid-2019. This sentiment is true now more than ever as we head into the second half of 2020. E-commerce giants like Alibaba and Shopify are growing their offerings and proving to be a viable challenger to banks, credit unions, and financial institutions across the globe.

In November 2019, McKinsey asserted that “traditional players exploring a play in POS financing have a limited period to enter the market and grow. In 18 to 24 months, laggards either will be unable to compete, because most merchants will already have POS financing partners, or will need to pay a heavy premium to get into the market.”

So how can your financial institution thrive in this growing market? Let’s identify the four business models that financial institutions are employing today:

Build: The end-to-end solution model

Financial institutions can opt to build their own end-to-end solution for point-of-sale financing. This involves a large investment in building the product offering themselves and usually lengthens the go-to-market timeline, which could prove even more costly in such a burgeoning segment of unsecured lending.

Buy: The platform-partnership solution

Financial institutions can partner with technology platforms to enable merchant clients to drive sales by offering an end-to-end solution that could include decisioning, verification, origination, and servicing. This solution lets the partner do the heavy lifting while allowing financial institutions to focus on growing their active or prospective merchant relationships.

The marketplace model

This model enables banks to compete in a marketplace of lenders and merchants. Financial institutions can tailor their terms and conditions to remain competitive in the market while gaining easier access to the consumer with little-to-no upfront investment.

What is the right solution for my financial institution?

The growing demand for point-of-sale financing is clear and present. While the long-term trajectory of the unsecured lending product remains somewhat unknown, the same principles that have guided banks for decades apply. Tailoring your point-of-sale solution to your risk profile has never been easier with multitudes of options in-market. Mitigating the fraud that continuously impacts banks remains a challenge for those entering the point-of-sale arena.

In order to understand which type of solution is right, every bank and financial institution should start by asking the following questions:

  • Is your bank or financial institution more focused on customer experience or growing the balance sheet?
  • What type of investment is your bank or financial institution willing to make? Building a program in-house could cost upwards of $20 million as an up-front investment.
  • When does your bank or financial institution want to go-to-market? Some builds can take longer than two years, whereas most partnerships can go-to-market in a matter of months.

Consumers demand more than just a slick interface. Financial institutions require an enterprise-grade solution that combines an orchestrated front-end with back-end intelligent decisioning tools, enabling on-the-fly fraud verification and servicing tools to provide a seamless user experience. These broader demands coupled with a need for limited up-front investment and speed-to-market make Amount Pay the enterprise solution for leading banks and financial institutions.

Amount Pay is an end-to-end, cloud-based solution that empowers financial institutions and merchants to offer customized financing options to consumers. Backed by the power of Amount 360, the omnichannel solution provides the freedom to apply from the web, mobile app, in-store, or over the phone. Leverage a powerful originations engine with quick approvals for fixed-rate loans with 12 to 72 month term lengths. Improve merchant client relationships, e-commerce user experiences, and boost sales.

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