Consumer lending has been steadily on the rise over the past decade and new players in purchase financing are contributing to this growth.
Facilitated by a new wave of fintech companies, purchase financing allows consumers to borrow short-term for immediate small and large expenditures. On the flipside, businesses can increase how much they sell by providing more financing options to their customers.
Market view from 5,000 feet
There is significant opportunity for purchase financing in today’s market.
“The eligible credit market for instant financing is huge, at $1.7 trillion,” said Blake Rosenthal, executive vice president, Acceptance Solutions at Mastercard. “Our research has shown that up to 80 percent of consumers would opt for an installments-based plan at the point of sale, with the highest appeal from heavy debit card users, overdraft users and credit or loan owners.”
Young people aren’t using credit cards as often as previous generations. Data from the Federal Reserve Bank of St. Louis showed millennials have lower credit card debt than previous generations, — millennials have, on average, $1,800 in unpaid credit cards compared to $2,700 for the previous generation.
A study by TransUnion compared millennials to Gen X during the same age period (21-34) and found millennials have borrowed 22 percent less in bank issued credit cards than their predecessors.
The decrease in credit card-specific debt could be a result of the CARD Act of 2009, which severely limited the marketing of credit cards to college students, encouraging them to use other payment methods during these formative ages.
As millennials are more apt to increase their personal debt to pay for everyday purchases, they are a key target for purchase financing companies.
Multiple working models
GreenSky offers buyers short term loans when they buy products at partner retailers. The firm doesn’t use its own capital — instead, via the firm’s mobile app or website, GreenSky connects consumers to commercial banks for financing at the time of purchase. This has significantly grown purchase financing at the point-of-sale and helped commercial banks play more of a role in purchase financing. GreenSky went public this past year and has its service installed at large retailers like Home Depot.
Launched by PayPal co-founder Max Levchin, Affirm works with 128 stores and ecommerce sites like Expedia, Peloton, and Wayfair. These stores outsource purchase financing to Affirm which offers their customers payment plans of three, six, and 12 months. Stores get paid upfront in full for their items and customers pay back Affirm over time.
Another similar financing solution, Australia’s Afterpay turns regular purchases into installment plans of four payments. The company takes on the credit risk and pays retailers upfront for a purchase a customer may not have otherwise made.
In the Afterpay process, the customer pays 25 percent of the purchase upfront. The order is shipped after the initial customer payment. Next, Afterpay pays the remaining balance to the retailer, assuming the customer’s credit risk. Lastly, the customer pays the remaining balance to Afterpay.
Alternative models, like the kind employed by ChargeAfter and Divido, don’t directly take on the customer credit risk. Instead, these firms match customers with the best financing options from their lending partners. Once again, this matching between borrower and lender happens instantly, reducing time to issue credit to the end customer.
Other purchase financing startups attack specific industries with new solutions. Uplift, for example, provides financing for travel. The company offers its travel financing through a partner network of travel sites. Rob Soderbery, the firm’s president, sees value for the end consumer and for partner platforms as well. “Our ability to reliably address fraud and risk on behalf of our partners reduces cost, which is a benefit for both partners and consumers,” he notes.
Some purchase financing solutions are encroaching into trade finance. Solutions like Behalf work with wholesale businesses and distributors to offer financing terms for buyers and sellers on the spot. A restaurant owner, for example, can get Behalf to pay for its quarterly order of flour. Behalf pays the supplier and extends credit to the buyer. The firm also integrates into ERP and invoicing systems.
Fintech companies are finding new ways to help consumers and businesses finance their purchases on the spot. While each provider approaches risk differently and addresses different markets, what they all have in common is creating a user experience that reduces the time and friction in obtaining credit for a transaction.