Tech startups are reviving physical and online Point of Sale (POS) lending to consumers, where money is advanced to complete the purchase of a specific item, usually over a fixed period. This contrasts to the revolving credit from credit card issuers (which never seems to go away), although issuers have been in the game of financing higher value items through “budget” plans for a long time.

In July 2013, McKinsey wrote that a virtuous cycle is driving the transformation of POS consumer lending:

• Retailer data on customer behavior and preferences is growing rapidly with the use of loyalty cards which gather transaction level data and increase multichannel engagement.
• Retailers can use the data to develop sophisticated customer segmentation for marketing and credit underwriting.
• Retailers can make personalized offers based on detailed understanding of the products consumers may be interested in and appropriate credit availability.
• Consumers increase their spending and engagement with retailers whose offer best meets their individual needs, both in terms of product fit and credit availability.

Point of Sale type of lending has become increasingly popular, as younger consumers are more comfortable taking up loans for specific purposes than carrying rolling credit card balances, according to an article in American Banker. This is echoed in the Economist, which states “Many young Americans dislike big banks and have been scared off revolving credit by the financial crisis. They are however willing to borrow over a fixed term for specific purchases such as a phone or a car”.

Online merchants in the US are increasingly recognizing the importance of offering instant finance to shoppers. In a recent survey conducted in Jan 2018, 64% said that they believed that providing online financing options, was an important driver of new and increased sales. 46% indicated that it would reduce cart abandonment, still one of the most critical challenges for retailers today. These views were borne out by the results of the consumer survey in which 75% of consumers indicated a preference for merchants offering instant financing.

Fintech companies are partnering with retailers and etailers across the world, and using their own balance sheets or partnering with banks for the finance, to offer POS consumer lending. Accordng to CBInsights, POS lenders raised funding in excess of $700 million between June 2017 and October 2018. Some examples are:

• Affirm is a San Francisco based online lender that has agreements with 1500 online retailers. Borrowers pay higher interest rates but end up paying less because they are not subject to hidden fees or compound interest
• Bilspay is a Baltimore fintech startup that has partnered with a Utah based bank called First Electronic Bank, to provide merchants with financing programs for their customers at no cost to the merchant
• Canadian start up FinanceIt has sold its solution to more than 1000 consumers
• Russian REVO raised USD 20 million
• GreenSky arranges finance for home improvements. It matches merchants such as Home Depot with banks like SunTrust to finance their loans. GreenSky makes money by charging fees to the merchants and the banks
• Square has introduced an offering called Square Installments in the U.S.
• Earlier this year, Australia’s Afterpay began offering installment plans in the U.S.
• Swedish payments company Klarna, which has teamed up with H&M to offer services in 14 markets, also offers loans to consumers at point of sale
• China Rapid Finance has grown through partnerships with e-commerce platforms but they have also sought to service the offline segment and have opened 70 offices. It does not use its own money but acts as an intermediary between client and partner banks. It has 1.2 million customers and has made more than 8.8 million loans to date
• German Kreditech pursues the same strategy – for online purchases only currently.
• South African FinYou is a wholly owned subsidiary of Clear Group Holdings which provides POS credit solutions for both physical and online stores
• South African Real People provides home improvement finance through a distribution channel of some 1,000 buildware retailers

Market players, such as PayPal, and banks appear to have missed the boat for implementing POS financing, due to their slow move into this financing space, despite being perfectly positioned to conquer it.

Traditional financing options available to consumers at POS from banks are typically credit cards, overdrafts or bank loans. Due to the sheer amount of paperwork, time, and added fees involved in these loan approvals, banks do not hold much of a chance in leading the way in the POS consumer space. Consumers expect an instantaneous and digital lending at checkout and, more importantly, transparency on the total cost of purchase.

That being said, credit card companies have always had an advantage in the POS financing space, considering they are already accepted at every single checkout worldwide. Those that find a way to benefit from this head start will be clear contenders to capture the POS consumer financing market.

Building a platform that benefits the merchant is as important as building one that benefits the consumer. These loans can help merchants drive sales by offering customers instant loan approvals at no extra cost.

The winners will be those that have access to large amounts of finance and a platform that attracts both consumers and retailers. Fintech is a necessary ingredient, and bank lending behind them can be a powerful addition.