Technology has transformed point of sale (POS) lending. POS loans are not new. They have been offered indirectly through department stores and health practitioners for years. But, the rise of digital technology has transformed the concept. In 2008, in a landmark deal, PayPal’s then-parent, eBay Inc., acquired Bill Me Later in a deal worth about US$900m. In the decade since, the trend toward POS lending is reshaping the consumer lending paradigm and driving greater sector convergence.
Two factors are contributing:
- The consumer relationship with credit has changed, partly in the aftermath of the global financial crisis and largely due to the rise of millennials. These buyers’ general distrust of credit and expectations of instant fulfillment have fueled demand for installment payments and other transparent borrowing options.
- Retailers face competitive pressure to drive top-line growth, with mega e-commerce retailers raising the bar for the online shopping experience. Merchants are embedding a seamless POS lending option to improve shopping cart conversion and the overall commerce experience. Besides Bill Me Later (rebranded as PayPal Credit in 2014), other POS lenders include Swedish-based Klarna, Affirm and Australia’s AfterPay. Models for these companies vary, but AfterPay works by taking the risk from the supplier, charging about 4% to merchants and collecting from end users who have linked a debit or credit card to the AfterPay account.
This space is evolving fast. US-based Bread Finance integrates more deeply into merchant websites — well before the paywall. For example, as a consumer browses, product prices are quoted at a nominal or financed monthly price, helping consumers envision different paths to purchasing.
Digital platforms broaden merchant financing options
As consumers access more financing options at purchase, payment providers offer different financing to merchants. Again, the rise of digital platforms and availability of big data analytics are major drivers, allowing lenders to make faster decisions and offer cheaper alternatives to the traditional merchant cash advance (MCA) — an advance against future debit or credit flows through the merchant account.
Merchant acquirers offer POS lending products to help customers solve a broader range of business needs — in this case, working capital financing. This also increases merchant lifetime values by introducing additional revenue streams — a valuable offset to compressing spreads experienced by acquirers in recent years.
In one example, Square launched Square Capital in 2014 to transition its MCA product to a “flexible loan product” through a partnership with Celtic Bank, a Utah-chartered industrial bank. Swift Financial, acquired by PayPal in 2017, provides short-term receivables-based financing services to business owners.