4 minute read 25 Jan 2019
Customer paying mechanic card reader digital tablet

How traditional lenders can find new opportunities in consumer financing

By

Kai-Christian Claus

EY Global Payments Leader

Strategic advisor for leading players in the global payments industry. Enthusiast with passion and energy.

4 minute read 25 Jan 2019

Digital lenders offer consumers faster, more transparent financing, and these online players now aim to conquer the offline market.

The emergence of new financing options at the moment of purchase is transforming consumer finance. Will these new options see payment service providers further disintermediate traditional banks from their heritage short-term consumer-financing business?

Not long ago, the only financing options available to a consumer at point of sale (POS) were credit cards, overdrafts or bank loans. While the first two options are quick and easy, consumers paid the price for convenience in higher credit terms. And while bank loans offered better terms, the paperwork and time involved were big deterrents. 

But consumer credit is undergoing radical changes. Technology and abundant data indicate merchants and financial institutions can now offer loans at the moment of purchase, either online or in stores. FinTechs are front-runners in the POS lending trend, where buyers make a direct agreement with the merchant for partial payment, meaning the loan is not subject to the anti-money laundering laws of banks (and does not require additional legitimation). These FinTechs are putting banks and other traditional consumer financing businesses under pressure.

For consumers, it’s easy to see the appeal of POS financing. It’s instantaneous and digital and can offer greater transparency on the total cost of the purchase. And this alternative form of financing liberates customers from mainstream credit options. 

For merchants, the key selling proposition of POS lending is — not surprisingly — fewer abandoned online shopping carts and higher sales. This new form of consumer financing potentially increases conversion rates by offering consumers intuitive, seamless and error-free loan processes and delivers high approval rates for loan applicants.

After already being successful in the online world, POS lenders are increasingly aiming to conquer the offline world by replicating the online lending experience at the real-world checkout. This is being done through means such as direct integration into POS terminals and through mobile apps that can generate a one-time-use virtual credit card number for universal acceptance.

Point-of-sale lending is an instant and convenient credit-granting process for consumers that is seamlessly embedded in the checkout process. Merchants benefit from potentially higher conversion rates.

Young borrowers put technology first and expect transparency

POS lending and the digital transformation of consumer financing meet the changing expectations and habits of young borrowers. Millennials and their successors in Generation Z are digital natives with smartphones, their devices of choice. Rather than talking to a specialist when taking out a loan, they prefer digital self-service tools that allow them to make an informed decision best suited to their needs.

These buyers have high expectations around digital offerings that have been shaped by leading digital and technology players. POS lenders have understood this from the beginning, and one of their hallmarks is their ability to provide a superior user experience. The rationale is easy to follow since one of the key metrics, conversion rate, is ultimately driven by a frictionless credit-granting process.

business relationships lending process graphic

As these younger borrowers become increasingly influential, the relevance of traditional bank branches for short-term loans is expected to further decrease, especially as banks ramp up their own digital finance offers. However, it would also be a mistake to completely dispense with the bank branch, since, if cleverly reinvented, it has the potential to be an important differentiator from the digital-only competition.

Young borrowers have the highest expectations from digital offerings — keeping them happy can potentially delight customers in other age groups.

What’s in it for the payments industry?

Traditional banks and financial institutions (FIs) have so far been hesitant to enter the POS lending space. In part, this is due to fears of undercutting their existing business, but for those that approach it in the right way, this form of lending has significant benefits:

  • Contextual information around the loan (i.e., goods purchased, demographics of purchaser) can enable a more dynamic risk-scoring process, leading to higher approval rates, lower default rates and tailored consumer pricing.
  • Sales and distribution efforts for POS lending can be leveraged within the merchant’s existing channels.
  • Direct business relationships with merchants allow for up- and cross-selling of payment-related services.

Untapped physical POS market provides big potential

POS lending is still in the relatively early stages of development but is available at an increasing number of online stores. Consumers have eagerly embraced this convenient, immediate and often more transparent form of credit, which is showing a younger digital-savvy generation of buyers the ease of dealing with FinTechs and alternative lenders. Looking ahead, we expect even greater potential for POS financing in the mostly untapped offline world. Opportunities are significant, not only for traditional players in consumer financing but also for those from the payments industry already present in the POS space.

  • This article appears in our #payments newsletter – volume 21; author contributions are from Christian Löw and Jakob Schniewind.

Summary

The digital transformation of consumer financing puts traditional lenders under pressure and presents opportunities for the payments industry.

About this article

By

Kai-Christian Claus

EY Global Payments Leader

Strategic advisor for leading players in the global payments industry. Enthusiast with passion and energy.