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POS Lending

John Fee, Vice President, Consumer Banking, PenFed Credit Union

John Fee, Vice President, Consumer Banking, PenFed Credit Union

• What is POS Lending


Despite the pandemic, unsecured lending volumes are at an all-time high, now even outperforming credit card originations. A good proportion of unsecured lending growth has come from the emerging sector of Point of Sale (POS) Lending. It occurs when a consumer performs a transaction and at “checkout” the merchant offers their customer an unsecured personal loan at the point of purchase, in order to assist them in buying the product or service. These types of transactions, especially for larger ticket and onetime purchases, are replacing the more traditional credit card, cash, and debit card transactions.

POS lending is nothing new, having been around for decades. It is the emergence of platforms and Fintechs like Affirm, Marcus, and Klarna that is bringing POS past the tipping point and creating the consumer/merchant awareness and preference to replace traditional open lines of credit. A majority of consumers under the age of 35 actually prefer fixed payment structures over the big box credit card, and the ability of POS technology to incorporate this strategy in the pre-purchase funnel actually increase upselling and cross-selling as well as overall sales conversion.

"These types of transactions, especially for larger ticket and one-time purchases, are replacing the more traditional credit card, cash, and debit card transactions"

COVID has brought large declines in overall spending in traditional in-store transactions. However, it is no hidden secret that online spending has dramatically increased, and in previously unpenetrated areas. POS Lending plays an emerging role in most verticals, but it will likely become the majority of large ticket e-commerce, home improvement, and medical/ dental financing in the next 5 years. The keys will be how many new POS platforms emerge, how quickly lenders integrate with this technology, how successful the current leaders are, and how Regtech provides the security and scalability for these players to expand.

• How does it work

POS Lending requires a couple of unique capabilities to be successful for the merchant, platform, and lender. A consumer needs to have transparency and clear communications related to what can be the multivariate of the POS options with payment terms and interest rates. This can become more complex when factoring in buy downs of the interest rate, merchant fees, and amount financed vs. purchase price. While Lenders are quite familiar with things like Fair Lending, it is often left to the platform/system (especially in terms of self-service) to explain the transaction to both merchant/ contractor and consumer.

If it is a products and services transaction, it will generally require a certificate of completion to be executed by the consumer/contractor. Think in terms of a new HVAC being installed in a consumer’s home. This could involve multiple visits by the contractor to first diagnose the problem, suggest a new HVAC, have the product purchased, and then subsequentially installed. Of course, it gets infinitely more complex when it becomes a multi-product and multi-service transaction with multi-staged funding and potentially multiple certificates of completion. Ensuring clarity of communications and the associated compliance is of the highest primacy, and this is a function of the platform technology and agreement with the funding lender. This generally requires new compliance processes, technology, and accounting.

The process is also susceptible to unfamiliar forms of fraud without the proper merchant underwriting, merchant monitoring, and accounting checks and balances. Unless a financial institution does a fair amount of small business lending, it is probably unfamiliar with the regulatory compliance and complexities of merchant vetting and onboarding required. This requires the new POS platform to have these capabilities or to be well integrated with lenders existing merchant programs if it exists, which can be harder to implement.

Finally, the funding stage of the merchant by the lender is a bit unorthodox for those new to POS lending. After the KYC of consumer and merchant, underwriting, the clarity of communications of what is being funded and the authorization to fund the loan by the consumer, there still remains how to get the funds to the merchant. This usually involves the establishment of sweep accounts, lines of credit, warehouse lines, or something similar either with the platform to disburse the funds or directly with the merchant. Additional complexities arise when these transactions have to be canceled, reversed, or refunded. A myriad of notification and compliance issues have to be addressed and communicated to the consumer and merchant. Without these communications, a lender faces the unwinding of numerous transactions that will overwhelm them while also creating a nightmare user experience that will sentence the best technologies to the dustbin of history.

Regtech plays a role at each stage, and there are emerging technologies that focus on singular portions of the POS transaction. Eventually, these “best of breed” will be assimilated by the larger platforms. As POS enters the “gold rush” phase, it will likely draw more attention from regulators due to the emergence of less sophisticated platforms looking to make a quick buck that have not learned the hard lessons of the more seasoned platforms and lenders. Regardless of which lenders and platforms are left standing, the one thing certain is that POS Lending is taking over and it will need Regtech solutions to solve the problems that everyone is trying to solve individually. 

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