Loans at point of sale are poised to take off

There's a young class of financial product that's been growing in popularity over the last year: purchase financing options. They're small loans with short-term repayment plans offered to customers at their online shopping checkout pages. Customers can get as quickly as they would execute a payment transaction, but the pricing of the loan is completely transparent. "Think of any loan you take out: you know you took out $10,000 at a 20 percent rate," said to Mike Landau, payments analyst at PwC. "But what does that actually add up to if you pay it off in a certain amount of time? How much do you actually spend? You have no idea." With a small loan at the point of sale, the lender sees every transaction — who is buying, what they’re buying and where — and underwrites them separately. "These products are coming in and showing the end value. You bought a couch for $1,000 and on X plan you will have spent $1,117 in total if you pay within the next 12 months," Landau said. "It’s laid out for the consumer in a way that’s easier to consume and digest." That’s a departure from how credit is underwritten today and provides more inputs for lenders, who never know how exactly borrowers are using the loan, to evaluate potential borrowers. Here are three things to watch in the hotly discussed point-of-sale financing space this year. How people think about loans If consumer habits change in the direction of point-of-sale financing, they’ll begin to think about lending more as an individual payment transaction — rather than the drawn out loan application process that comes with home, car or student loans, for example. It could force card issuers to follow suit and potentially begin offering similar products. They’re already concerned their brands are being replaced by others’ at the point of sale — with mobile wallets, customers don’t think of paying with their Chase card, they think about paying with Apple Pay. Which card they select to pay for purchases is a back-of-mind, passive decision for the mobile wallet user. Most issuers aren’t playing in this space yet, according to Landau. That’s largely because a lot of the players that offer financing at the point of sale (there are a lot of them now, including Affirm, Klarna, Bread and Vyze) — just haven’t captured that much of volume yet in the U.S. “That hasn't happened here because we have another product that works really well: the credit card,” Landau said. With the exception of the U.K., most countries in Europe don’t have the intense credit card culture of the U.S. Retailers don’t like it and a lot of countries there have their own payment network, Landau added. “This is really a change in habit and in consumers’ understanding of how to best finance their purchasing habits,” he said. “We’ve learned from many other instances in payments that will definitely take time — look at mobile wallet adoption.” New points of competition for customer attention Banks know they’re not competing against other banks for customer attention anymore, or even fintech startups, who usually require bank partnerships to thrive. The competition is customer experiences in other industries; namely, retail. The growth of the purchase financing niche is only going to create more points at which to compete for consumer attention. Some retailers already aggregate different lenders at the point of sale; instead of pushing co-branded credit cards at the checkout page, they also offer a number of different loans from various lenders. Some lending companies work with manufacturers as well as retailers. If a customer is buying a TV on her phone, for example, she could be pushed a loan at checkout from one of the loan companies; the manufacturer could also promote the financing option while they're still considering taking it off the shelf at all. That way, manufacturers can outfit more of the supply channel in a shopping experience to close the deal. It’s a cart abandonment play. How incumbent financial firms and credit card companies defend themselves against competing brands boils down to the economics of the various relationships involved, said Geoffrey Kott, head of finance and corporate strategy at Cross River Bank. “Say I have Apple Pay linked to an Amex card: What will Amex do to help funnel me so if I use Apple Pay I'm using their card and not someone else’s? What are merchants doing to ensure they’re offering or not offering relevant credit cards at the point of sale? It goes back to the adjacent relationships that have to be strengthened to ensure a product is front and center of a consumer’s mind.” Some brands have replaced their private label credit cards with Affirm completely, said Ryan Metcalf, Affirm’s director of international markets. Affirm has completely displaced Motorola’s Comenity Bank-issued cards, for example, he said. Merchants have stopped using schemes like deferred interest promotions, which puts banks like Synchrony at a disadvantage. “Those players because they use programs like that to charge less to the merchant than their competitors do and push those costs onto customers,” he said. “It’s a bad user experience and it damages brands. We have lots of survey data that shows customers know what these programs are, they understand that they probably are going to screw them and they associate that experience with the brand.” Seller-driven to buyer-driven How to drive customer usage and experience will be a focus for these types of lending startups in 2018. Purchase financing is pretty seller-driven. Lenders like Affirm plug into sellers’ infrastructure and make themselves front and center of their merchant partners’ pages — the product page, the cart page, the payment method selection area, the homepage and sometime even a dedicated landing page. “How can there be that shift or adjacency to buyer-driven functionality — where the buyer now has something that they haven't had, an outlet for financing, versus it coming from lender-driven infrastructure?” said Cross River Bank's Kott. One way would be for lending companies like Affirm and Bread to incorporate mobile payments solutions to expand the functionalities of this type of lending, he added. Another could be through a consumer app. Affirm is building one now. For most of the time since its 2012 inception its business has been merchant integration. In October, it launched its first direct to consumer app initially as platform through which customers could repay their Affirm loans. Now, it effectively serves as a line of credit customers can you for almost any online purchase, whether the retailer is integrated with Affirm or not. And, unsurprisingly, the company wants to move beyond consumer loans and credit and bring in some financial planning and management capabilities. “That product will be the vessel for all of our future products that are direct-to-consumer and that will move us beyond just extending credit but really helping people manage their daily finances,” Metcalf said. “Our ultimate goal is for Affirm to be the app on your home screen for all of your financial needs. In the meantime, our core business will still be helping merchants from a marketing perspective.”