The Rise of Point-of-Sale Financing

November 22, 2018

MONTHLY ANALYSIS

The rise of point-of-sale (POS) financing comes as an answer to a continuous lack of options to finance shopping and a continuous need to do so.

While more than half of US consumers held six or more payment instruments in 2017, consumers continue to mostly use debit cards, cash, and credit cards for payments. The median number of credit cards for credit cardholders was three.

In 2015, credit and debit cards accounted for 2/3 of non-cash payments processed. At some point, in 2017, 54.5% of credit card adopters carried an unpaid balance (59% in 2015).

Moreover, according to TransUnion, in Q2 2018, the number of consumers with credit cards grew to an all-time high with the continued anticipated increase in serious delinquency (borrower delinquency rates of 90+ days past due (DPD)). The number of consumers with access to a bankcard reached a new milestone of 176 million in Q2 2018, an increase of 2.2% from the previous year.

Overall, the average balance per borrower grew 2.2% year-over-year in Q2, primarily driven by subprime growth. Subprime originations grew 3.9% year-over-year, but lenders reduced credit lines on these accounts by 10%.

Credit card use increased between 2015 and 2017, and consumers’ assessment of credit cards was positive, according to the Federal Reserve Bank of Boston – they gave credit cards the highest ratings of all payment instruments for acceptance, convenience, payment records, and security. The results of studies published by the Federal Reserve Bank of Boston on consumer payments choices indicate growth in the use of credit cards for transactions.

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Source: The 2016 and 2017 Surveys of Consumer Payment Choice: Summary Results, The Federal Reserve Bank of Boston

Around half of monthly goods purchases in a decade between the end of 2007 and the end of 2017 are made in person, with a growing part of goods and services purchased monthly online and slightly shrinking share of in-person goods purchases (although the share still remains high – close to 50%).

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Source: The 2016 and 2017 Surveys of Consumer Payment Choice: Summary Results, The Federal Reserve Bank of Boston

The strong standing of in-person shopping for goods, the rise of online shopping, and the strong position of alternative payment methods are feeding the rise of POS financing as a break from the traditional retail financing industry structure.

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Source: Growth trends in retail consumer financing for 2017

Basically, options are traditionally limited to credit cards for those who cannot outright pay for goods and services. Meanwhile, Affirm conducted a survey of 1,000+ people between the ages of 22 and 44 and found that 87% want a way to pay for purchases over time that isn’t a credit card.

Another survey – from Square – found that 84% of participants appreciate the flexibility to pay overtime for large purchases and that average order size increases 15% among businesses that offer consumer credit.

Affirm explains that the desire is driven primarily by the uncertainty that credit cards bring to shopping. Over 60% of respondents said they are moderately, very or extremely worried about getting into debt. In Q2 2018, outstanding credit card debt in the US hit $829 billion (+$14 billion of quarterly change and +$45 billion in annual change).

Affirm is among a number of other companies exploring POS financing:

Miron Lulic, Founder & CEO of SuperMoney, a financial services firm offering real-time financial tools for business owners, notes that the benefits of POS financing include:

  • More sales

  • Allows customers to purchase items of greater cost

  • Provides a positive company image to customers

  • Improves cash flow

  • Recruits and retains customers

  • Widens customer base

Some estimates suggest that companies that implemented an online POS financing option experienced a 32% increase in sales. Moreover, the companies that offer POS financing experience an average increase in order value of 75%.

Results vary by a client and a provider, but there are some affirmative stats on the financial benefit of extending a POS loan to consumers. For example, since introducing Affirm into their physical stores, Simply Mac has seen a 20% increase in average order values above what they saw previously. They’ve also seen better customer engagement with 63% more applications and 34% more approvals per store.

A Bread case study with jeweler EraGem showed a 172% increase in year-over-year revenue that was attributed to financing. Over 20% of EraGem’s 2018 sales have been financed with Bread. EraGem’s financed average order value has risen by 17% since introducing Bread, while total financed sales with Bread are 241% higher than its previous financing provider.

The company also tested its solution in a holiday time. In a year-over-year comparison of the four-day holiday weekend, Bread outperformed Digital Storm’s (computer manufacturer in the US, specializes on high-performance gaming desktop and laptop computers) previous financing partner 2X. After switching to Bread from their previous financing partner, Digital Storm saw a 2.65X year-over-year increase in financed sales and a 1.5X increase in the average order value of financed sales. Over 69.3% of all customers chose a 36-month term, with 54.8% of customers pre-qualifying before they reached the cart.

With RTA Stores, the implementation of Bread led to 8.5% incremental increase in year-over-year sales, 130% higher average order value for customers who used Bread financing compared to customers who did not use financing, and 3.7% of total customers were won back after being offered Bread financing.

Another POS financing solution provider – Vyze – shared case studies demonstrating the impact of POS financing on approvals and repeat sales. With Vyze, appliances and electronics seller BrandsMart had a 90% approval rate and reached 71% of repeat sales as a percentage of total sales. The average financed purchase for the retailer was at $1,062.

With Vyze, The Home Depot was able to offer 84% of its customers a credit and reached 75% of repeat sales as a percentage of total sales. Repeat sales for The Home Depot grew 191% in one year from over 27,000 to over 79,000. Repeat finance volume exceeded $19 million.

While there are clear quantifiable benefits for businesses and consumers, an interesting thing with the democratization of financing is that it comes with the same issues for businesses as an alternative funding comes to a startup. Professionals note that the catch with POS financing solutions is hefty fees for setting up and managing these programs. While POS lenders don’t normally charge additional fees to customers for their convenience, business owners get hit with discount fees of 10% to 20% of the loan amount.

Hefty fees for convenience (cheap and instant installment plans for consumers) are a matter of time – there are a plethora of technology startups building alternative scoring frameworks that could find their most lucrative application in POS financing.

For consumers, the convenience with POS financing comes at its unique cost. The increased average volume for merchants translates into easier spending for consumers. With the opportunity to shop more and exceptional user experience, consumers don’t immediately feel the costs — a rather controversial benefit. One of the most important points for criticism over easier access to alternative financing for consumer goods is the promotion of unnecessary consumerism at a higher price than traditional methods would result in.

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Source: The Problem with Affirm Loans, 2015

Mentioned earlier Affirm, for example, is used to demonstrate the difference in how much interest consumers end up paying on a 12-month loan for an $850 purchase.

The ethics of lending to the subprime are not particularly clear. The tech industry, however, will likely see a correction from a credit push approach to a responsible extension of funds – all based on the recovery rates and behavioral data.

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