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Payments Briefing: Does lease-to-own provide a “recession-proof” alternative to BNPL?

  • This week, we explore lease-to-own, an installment payment option that has been gaining popularity in recent months.
  • We also discuss SMBs' increasing reliance on cross-border payments, and the steps that providers can take to serve them better.
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Payments Briefing: Does lease-to-own provide a “recession-proof” alternative to BNPL?

As inflation continues at record levels and consumers seek out flexible options to pay for household items such as refrigerators, laptops, and furniture, alternative payment options like lease-to-own are growing in popularity.

This is particularly significant as BNPL – one of the most popular options in alternative credit in recent times – is facing strong headwinds due to rising interest rates, growing consumer debt, and slimmer profit margins, as well as shrinking investor confidence amid fears of a major recession.

In this climate, lease-to-own (LTO), a type of installment payment that has actually been around for decades, seems to be re-emerging as a potential solution for consumers seeking an alternative way to break up their purchases into manageable payments. While BNPL has lately been criticized for leaving subprime consumers with mounting debt, proponents of LTO say it provides these consumers with flexible payment options without indebting them. Some are referring to it as “BNPL’s recession-proof cousin”.

So, what exactly is LTO, and how does it function? In what ways is it similar to BNPL, and how do the two differ?

I spoke with Orlando Zayas, CEO of Katapult, one of the leading lease-to-own platforms that integrates with omnichannel retailers and e-commerce platforms such as Wayfair, Lenovo, and Nectar. Orlando shared with me his views on why lease-to-own is a useful payment method for FIs, brands, retailers and consumers, and how it could potentially ease the burden of inflation on consumers, especially as providers of other payment options such as BNPL tighten their lending standards.

Here’s my conversation with Orlando.

What exactly is lease-to-own? What is its utility for financial services providers, brands, retailers, and consumers?

LTO is an attractive option that allows consumers with no or evolving credit to obtain the durable goods they need through a lease-to-own agreement with the lease-purchase provider. There is no long-term obligation for the customer to continue leasing, and customers can typically return the product to the LTO provider, not to the retailer, with no further obligation other than for amounts past due. In the LTO space, items are owned by LTO providers, like Katapult, and therefore, if the retailer return window has expired, the items are returned to us and not to the retailer.

Most traditional financial service providers don’t offer a lease-purchase solution in the way that Katapult and other lease-to-own providers do. However, brands, retailers, and consumers all benefit from lease-to-own. For brands and retailers, LTO is another tool for capturing an overlooked audience – they can reach a new customer base that may not have had access to their products otherwise. Additionally, by offering LTO, retailers and brands can increase transactions, improve customer loyalty, and boost revenue. For consumers, LTO offers a path to purchasing the goods that are needed – even for those with no or blemished credit, who may not be able to access them otherwise. 

What are the differences between BNPL and LTO? Why are the two often compared? What are their pros and cons relative to each other?

BNPL and LTO are often compared as they are both alternative payment solutions that allow consumers to buy products in installments without utilizing a traditional financial method for payment, such as credit. However, they have different purposes and different audiences. While BNPL is often used by customers as a way to spread out their payments over time, there are still standards as to who can obtain items using this method. On the flip side, LTO uses an underwriting process, but is primarily focused on supporting nonprime or subprime consumers. Additionally, BNPL is used most often for smaller items such as clothing or groceries, while LTO is utilized more for acquiring durable goods such as furniture, consumer electronics, etc.

As the name suggests, when a person uses BNPL, they are purchasing an item, whereas when they use LTO, they lease it. With an LTO transaction, consumers typically have several paths to ownership for the product they’re leasing. With each payment, the customer has the option to exercise a buyout option at any time, continue leasing for the full term of the agreement resulting in automatic ownership of the item(s), or return the items without any further obligations other than paying any outstanding fees already incurred.  

Depending on a person’s situation, LTO and BNPL can both be valuable options. At Katapult, we have a partnership with the BNPL company Affirm – if a consumer doesn’t qualify for Affirm, they are referred to us, and when a consumer does well with Katapult, we refer them to Affirm. It’s important for consumers to have options, and we believe in giving them the best choices for their lifestyle.

How has the LTO industry evolved over time, and how can the current model help address issues of inequality and price transparency in financial services?

While LTO has been around for decades, the current model offered by Katapult and other newer LTO companies is different. Traditional LTO is thought of as a brick-and-mortar store with few goods to choose from, that come from one supplier, and that are of lower quality and higher expense. However, Katapult and the other newer LTO companies are omnichannel, meaning they can be utilized in-store or online. Additionally, Katapult integrates with name brands such as Wayfair, Lenovo, Purple Mattress, and more, to provide consumers with the high-quality items and choices that they seek. The process of applying for a lease-purchase agreement is also quick, easy, and transparent. Applicants are approved within seconds, and they are given the details of their lease upfront, so they are familiar with the terms and there are no surprises. By offering options that are specifically meant to help nonprime and subprime customers who may not have other solutions, retailers are helping to create a more inclusive experience. 

How could LTO ease the burden of inflation on consumers, especially as providers of other payment options, such as BNPL, tighten their lending standards?

With traditional lenders and BNPL providers tightening their lending decisioning due to the macroeconomic climate, more consumers will be declined by prime providers. As prices for all items rise due to inflation, those that are already living paycheck-to-paycheck will struggle even more. Lease-to-own allows them to get the items that they need, when they need them, meeting them where they are on their financial journey. The solution allows them to make recurring lease payments and determine a schedule that works for their lifestyle (people can make payments weekly, biweekly, or monthly). Additionally, with the lease purchase, consumers can return the product at any time, without future recurring payments, and with no further obligation other than paying any outstanding fees already incurred. For those with no credit or blemished credit, this can be the best and only way for them to get the items that they need.

SMBs are increasingly reliant on cross-border payments, with a preference for digital solutions

While the pandemic affected businesses of all sizes, SMBs were hit especially hard. But they displayed great resilience, and many find themselves better off than they were before the pandemic.

Mastercard’s recent report on cross-border payments found that, of the 3000+ SMBs surveyed globally, 46% reported generating higher revenues than before the pandemic. Business owners and executives themselves are surprised by this, with more than half saying their business grew much more than expected.

The report argues that this recovery was in part because SMBs generally moved from a local to a global perspective, pivoting to e-commerce and international sales. Three-quarters of SMBs said the pandemic forced them to look abroad for business, and around 60% say this allowed them to grow their businesses. What powered SMBs’ ability to pivot was the increased sophistication of digital solutions for cross-border payments, enabling businesses to make and receive payments securely and in a timely manner.

While SMBs were already using digital payment solutions before the pandemic, their need for and dependency on digital payments was amplified by it. In 2021, nearly three-quarters of SMBs were reportedly using web-based payment platforms from banks, money transfer companies and other providers, while approximately two-thirds were using mobile apps. Furthermore:

  • Over 80% of SMBs say they feel comfortable using online cross-border solutions to send payments;
  • Around 80% say that digital cross-border payments platforms help improve their business efficiency;
  • Over 50% say these platforms have helped them grow, improve cash flow, and ultimately survive.

SMBs were nervous about global payment systems going into the pandemic, fearing that they may fall through, and were pleasantly surprised. More than half said they feared the network would be more negatively affected by the pandemic. There was also uncertainty around whether governments would restrict cross-border payments as a pandemic response measure.

But the more important question for payment providers is, what do businesses want from digital cross-border payment solutions?

The most important thing for businesses was security – assurance from any service provider that the transaction, and their personal and financial information, will not be compromised. 

Secondly, time was found to be of great importance – businesses expect funds to be delivered within 24 hours. Efficiency of a companion mobile app is also significant for businesses – they not only want to be able to use smartphones to complete a transfer, but also want constant updates about its completion, or the ability to track it in real time, for example. 

How much businesses are charged for moving funds abroad is also of significance. SMBs expect service providers to give them awareness of how much the transfer will cost, and how much will be received upfront. Additionally, competitive FX rates and fees have also become more or less an expectation now.

In its report, Mastercard identified a number of steps that providers can take to grow their business and serve their customers better.

First, it’s important that providers build safe networks, and adequately educate their usersabout them. Almost half of users, consumers or businesses fear fraud when transferring funds internationally.

Providers need to also focus on improving their pricing. Almost half of users feel they receive poor exchange rates, and are charged high fees for their transactions. Hand in hand with the last point, businesses wish for greater transparency. That means receipts for each transaction, and the ability to track them.

Additionally, for SMBs, a big network is important. They find it frustrating if their preferred provider does not operate in the country they wish to send money to. SMBs also demand a greater variety of payout options, so that their international partners can take advantage of that, and hence be more likely to want to work with them.

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What we're reading

  • Zelle hits 5-year milestone with 5 billion payments (Finextra)
  • DailyPay launches prepaid card, app for employees getting on-demand pay (PYMNTS)
  • Inside Citizens Bank’s growing BNPL strategy (The Financial Brand)
  • US lawmakers demand answers from fintech Credova on BNPL gun sales (Bloomberg)
  • FIS targets central banks with real-time payments and CBDC tech (Finextra)
  • PayPal debuts ‘Grant Payments’ to shift charitable giving from paper checks to electronic transfers (TechCrunch)
  • Visa tokens overtake physical cards in circulation (Finextra)
  • BNPL tech pioneers squeezed as big banks muscle in (Bloomberg)
  • T. Rowe Price cuts Stripe valuation by 64% (Bloomberg)
  • Square sellers across the UK can now offer BNPL through Clearpay (Afterpay) integration (Finextra)

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