Point of Sale Credit Takes Off

Neither a borrower nor a lender be, counseled Shakespeare’s Polonius. He never met today’s raft of tech-based creditors serving merchants eager to pump out sales.

Stores have been offering credit to customers for at least a century. But the latest twist is to offer credit while the customer is at the cash register or in front of a checkout screen as a further inducement to make or add to a purchase.

And lately, the mobile phone is making it easier than ever to extend a loan as part of a sale, opening the vast market of physical stores to a new breed of transactional-credit firms.

Now companies that jumped into this business only a few years ago are filling a void left by credit card issuers and conventional lenders. And they’re increasingly moving into bigger merchants. Just ask Affirm Inc., a fast-growing 7-year-old lender that landed Walmart Inc. in February.

The significance of bagging the country’s biggest merchant for both in-store and online sales wasn’t lost on the industry.

“It’s a testament to our growth that we’re able to sustain a merchant of that size,” says Elizabeth Allin, vice president of communications for the San Francisco-based company whose other clients include shoe merchant Cole Haan, online-travel impresarios Orbitz and Expedia, fitness-equipment seller Peloton, and furniture retailer Wayfair.

‘They Have No Idea’

So-called fintechs like Affirm, Klarna, GreenSky, and PayPal Holdings Inc.’s PayPal Credit are carving up a credit-hungry market. Fintechs accounted for just 5% of U.S. personal lending in 2013, according to TransUnion, the credit-reporting company. Five years later, they controlled 38%, by far the biggest share in a market that includes banks, credit unions, and traditional finance companies.

Of course, banks aren’t always shut out when an upstart nonbank butts in. Affirm’s loans, for example, are funded by Cross River Bank Inc. in Teaneck, N.J. And credit card issuers aren’t taking the challenge lying down. “Banks are already responding with an installment-loan option on credit cards,” says Leslie Parrish, who follows the business as an analyst at Boston-based financial-services consultancy Aite Group LLC. She cites Chase and Citi as examples.

Some observers caution that, with the exception of PayPal Credit, none of this new breed of fintech lender has had to weather a deep downturn in the economy. The last time that happened, in 2008-09, these firms didn’t exist. “They have no idea” what could be coming, cautions Parrish’s compatriot Thad Peterson, who last summer released an Aite research report on transactional credit.

But what merchants are hoping for before that happens is a gusher of transactions, and bigger average orders, fueled by this burgeoning form of credit. Experts agree the loans are consumer-friendly—and quickly evolving from promotional offers to actual installment loans that can stretch over three to nine months.

Plus, they’re fast, private, and easy to set up. While you’re standing in front of the sofa and imagining how it will look in your family room, you can check on your smart phone to see whether you can qualify for a loan, and get approved before you find the salesperson to pay and check out.

As the option penetrates more stores and Web sites, the potential for gushers of sales becomes more real. “It hasn’t necessarily increased the number of transactions yet, but as consumer awareness grows, it has the potential to increase transaction volume in the future,” says Parrish.

Targeting Transactors

So much so, in fact, that some entrepreneurs are looking to deploy their technology on behalf of financial institutions that don’t want to be left out. One tactic that appeals to them is to use transactional credit to start earning interest income from so-called transactors—credit card holders that use the card but never revolve.

That’s a market San Francisco-based MyGini Inc. is hoping to serve. The 3-year-old company’s technology works with both physical and online merchants and allows banks to extend credit offers on cardholders’ phones after they have checked out with a Visa or Mastercard.

The system should appeal to retailers, too, says Mehmet Sezgin, the former Mastercard Inc. and BBVA executive who started MyGini.

“Merchants are coming under even more pressure to sell,” he says. “We see that every day with stores closing down. That’s not going to go away.” Only 56% of startup businesses survive into their sixth year, according to numbers from the Bureau of Labor Statistics.

Sezgin hopes to have a pilot running this summer. “We are reaching out to banks through Visa and Mastercard,” he says. But he concedes it will take time to sign up banks. For one thing, the alerts the service relies on must be approved by cardholders as well as by the networks.

But as this market attracts more startups, more established players are driving hard for market share. The granddaddy in this business is PayPal Credit, which started out 19 years ago as BillMeLater. It was acquired by PayPal in 2008 and ultimately renamed. But one thing hasn’t changed: it still focuses on e-commerce.

“I won’t say never, but we will innovate,” says Susan Schmidt, vice president of U.S consumer credit at PayPal Credit, when asked about moving into the physical point of sale.

PayPal Credit will be hard for startups to displace. As the longest-established of the fintech providers, it has had time to build up a base of loyal users. While Schmidt won’t reveal numbers, she says fully one-third of its active customers use PayPal Credit exclusively. Another plus is its survival in that last recession, which was perhaps the deepest since the 1930s.

“It’s a huge advantage. We’ve built underwriting muscle,” Schmidt says. Looking at the bevy of rivals that have sprung up in the past 10 years, she issues a none-too-subtle warning. “We will see what happens when we go through the next cycle, which is inevitable.”

The offer is very simple—six months at no interest if paid in full. But PayPal has also added two cobranded Mastercards for good measure. And it doesn’t see any need for now to make changes in that basic proposition. “Just the size of the market is a positive thing,” says Schmidt. “Our customers are telling us they want and need transactional financing.”

More In-Store Deals

But in this business, nothing caught the attention of payments professionals more than Affirm’s deal with Walmart. That deal seems to have put transactional credit on the map as a big-time opportunity. “We’re exceptionally proud of it,” says Affirm’s Allin.

Not that consumers will be able finance just anything the big retailer sells. Bananas, for example. “There’s a list of things we’re not appropriate for,” Allin says. But a new lawn mower gets a yes. While Affirm usually works with a virtual card on the user’s phone, the service will work at Walmart with barcodes on readers the giant chain has already installed for Walmart Pay. At the point of sale, “you can do everything on your phone,” says Allin.

More such deals could be coming. Walmart is the latest signup in an in-store campaign Affirm launched a year ago with Peloton and others. “It will increase,” Allin promises.

Affirm extends credit at rates ranging from zero to 30%, with an average of 17%. Payback is expected in anywhere from six to 12 months. “It’s impossible to revolve,” Allin says. The payoff for the merchant is what she describes as a 20% lift in conversions—people who buy who wouldn’t have otherwise.

Transactional credit competes in a market that includes other unsecured loan products like credit cards. While it may prove to be a boon for merchant sales, it will likely rise and fall, and not necessarily in lockstep with its unsecured cousins in what can be a volatile market.

“For the next 12 to 24 months, we’ll see growth [in unsecured credit],” says Aite’s Parrish. “The question is, will it be growth in credit card outstandings or in [transactional credit].”