The financial services industry has entered a new era where technology determines the brand experience, what customers do, and where they go next. Jim Marous, co-publisher of The Financial Brand suggests, “Financial institutions must be able to deliver an easy-to-navigate, seamless digital platform that goes far beyond a miniaturized online banking offer.” In this blog we consider the convergence of payments and lending and why banks need to act.

Payment used to mean the settlement of a transaction with the movement of funds. It marked the end of a customer journey, the completion of a contract. Historically, a payment was nothing to get excited about, just a standard commodity that was volume-driven with little scope to differentiate or add value. However, times change and there is growing interest in payments as a major brand touchpoint and an opportunity to add value, for example with point of sale (POS) financing.

Back to the Future – Buy Now Pay Later (BNPL)

POS lending is nothing new, “Buy now, pay later” was a popular slogan in 1920s retailing. At that time consumers were encouraged to select what they wanted, arrange convenient terms and take immediate delivery, provided they could afford the monthly repayments. These factors remain relevant today, but the real-time digital economy is transforming the delivery of POS lending.

With a tech-first approach, POS lending (a.k.a. BNPL) provides short-term consumer loans exactly where and when they are needed. This stands in sharp contrast to traditional loans that often require extensive paperwork which takes time to prepare and approve. POS lending is also disrupting credit card loans as it integrates finance with the digital shopping experience.

So, what’s driving these changes?

Meeting Customer Needs in Context

Generally speaking, customers are impatient and demanding. They increasingly expect services to be offered in context, and many are more likely (or able) to buy if financing is readily available. A recent study found that 76% of shoppers were more likely to purchase if payment is backed by POS financing. The same study also found that 39% of consumers would spend more money, if given a POS financing option. Moreover, 28% of consumers would like a POS financing option as part of the online checkout process. The truth is that banks cannot ignore POS lending, because it is both a threat and an opportunity.*  

COVID-19 Forces Change

Banks of all sizes are moving into Buy Now Pay Later POS lending, and some have partnered with fintechs and payments companies to accelerate progress. Many more need to act soon as the pandemic is forcing the pace of change.

“Hire purchase” via POS financing is booming. In a push to drive business growth, numerous retailers now offer BNPL options to let consumers spread purchases across multiple payments, sometimes without interest or fees, though as always consumers are advised to read the fine print and be aware that there can be substantial penalties for missed or late payments. The BNPL approach makes big-ticket purchases easier to manage for many, but it’s not limited to big-ticket items only – today’s consumer can pay for almost anything in installments.

Credit Cards Going Out of Fashion?

Since the start of the pandemic, the value of U.S. credit card transactions has dropped by approximately 11%.** Consumers have paid down debts in the wake of huge job losses and economic shutdowns. A trend towards lower credit card balances is universal across all social groups. Furthermore, recent data suggests a universal decline in credit card ownership. This is most pronounced among “Gen Z” where more than half of that demographic do not own a credit card. As credit card use goes by the wayside, so do the banks’ revenue streams from interchange fees and other card-related fees.

Why Banks Need to Act

Buy Now Pay Later POS lending is a growth industry and an opportunity for banks to offset declining credit card transaction volumes/revenues. However, this opportunity should not be considered in isolation but as part of a bank’s overall digitalization strategy. POS lending should be pursued in parallel with the bank’s overall digital lending strategy as there is much overlap.

As the digital world spins faster, people expect financial services to be aligned with their busy and demanding lifestyles. The wide adoption of POS financing being universally integrated into purchases reduces friction, grows sales, and gives consumers more options to improve the customer experience. Banks that ignore this market dynamic risk missing out on the opportunity to engage with future generations of borrowers.

To help accelerate progress banks should speak to their technical partners to discover how to include POS financing in their digitalization strategy and nimbly adapt to the shift away from credit cards to POS financing. Seamlessly integrating POS lending capability is the wave of the future.

In upcoming blogs we’ll further explore lending in the context of the evolving financial ecosystem.

* The Financial Brand, Growth of POS Financing Is Both Threat and Opportunity to Retail Banking

** https://www.experian.com/blogs/ask-experian/state-of-credit-cards/