The Technology Edge: How Non-Banks are Seeking to Dominate Point of Sale Lending

The Technology Edge: How Non-Banks are Seeking to Dominate Point of Sale Lending

LendIt Fintech USA 2018, April 9-11 in San Francisco, was a huge success. One of the more interesting panels was on how the non-banking sector is taking over point-of-sale (POS) lending. Kim Gerhardt, director at the San Francisco office of Edgar, Dunn and Company, moderated the panel. Other panelists included Peter Kalen, Michael Garrity, Mark […]

The Technology Edge: How Non-Banks are Seeking to Dominate Point of Sale Lending

LendIt Fintech USA 2018, April 9-11 in San Francisco, was a huge success. One of the more interesting panels was on how the non-banking sector is taking over point-of-sale (POS) lending. Kim Gerhardt, director at the San Francisco office of Edgar, Dunn and Company, moderated the panel. Other panelists included Peter Kalen, Michael Garrity, Mark Lorimer, and Camilo Concha.

Kalen is founder and CEO of Flexiti Financial, a Canadian company founded in 2013 that specializes in providing easy, instant POS financing through its award-winning mobile application process.

Garrity is co-founder, CEO, and president of a platform that has enabled merchants to facilitate consumer lending since November 2010. Financeit has processed over $2.5 billion in loan applications from thousands of merchants.

Lorimer represents LendingPoint, a lending company founded in 2014 that focuses on personal loans and debt consolidation. He is chief marketing officer. LendingPoint recently acquired LoanHero, which is in the POS lending business.

Finally, Concha is founder and CEO of LendingUSA, a company that provides innovative financing solutions with a specialization in POS lending. LendingUSA was launched in 2013 and caters to consumer finance in a variety of sectors from medical, pet care, consumer goods and services, etc.

Over the years, the POS lending industry has gained scale and seen a radical change. A convergence can be witnessed in the way payments are made and fintech lending is facilitated. The opportunity in POS financing is massive, and banks seemed to have missed the ball. Traditional banks strive to serve everyone, but when it comes to POS lending, merchants have to filter their prospective customers through a narrow funnel extending loans to a comparatively small customer base.

Flexiti Financial’s Entry in POS Lending

When Peter Kalen was asked about what brought Flexiti Financial into the business, the product that it is offering, and the level of traction it has been able to create in the market among other merchants, he articulated that Flexiti’s product is somewhat similar to what Synchrony or Alliance Data System is offering. Flexiti differs in the way transactions take place and aims to reduce the time consumed in the loan application process.

Many organizations issue private label credit cards, but application processes are long and approval rates low. With its experience and vision, Flexiti Financial has successfully introduced a 100% paperless process to offer instant POS financing. Its virtual credit card application can be downloaded from the Google Play store and the Apple store.

These private label cards speed up the loan application process, bringing the process down to three minutes. This is a win-win for retailers and customers. The platform improves the online retailer’s UX by removing the friction at the front-end.

Financeit and Point of Sale Lending

Garrity also shared his views on point of sale lending. He put emphasis on the fact that personal lending is more about new transactions and focuses less on lending. Everything in POS lending, from the technology to APIs is obsessed with enabling easy sales for merchants, improving their experience, and supporting them as they try to close more business. Merchants and customers want financing options, but they do not want to indulge in complicated programs.

Another area that Financeit targets is debt consolidation. The company has delivered a platform that makes it easy for businesses to offer powerful financing options to their customers from any device.

When asked about how they excel at delivering services to customers, Garrity said they have acquired Centah Inc, a company operating in home improvement work-flow and lead management software with joint partner and investor Goldman Sachs. The company redesigned its website to create a platform that manages the process, helps businesses connect with customers, provide dispatch scheduling systems, and represent financing options to customers throughout the process. He warnes other players that if they only focus on financing and not on the transaction, they will be missing out on an important aspect of dominating this space.

LendingUSA’s Role in POS Lending

Gerhardt asked Concha about his journey into this industry. Concha shared that LendingUSA focuses on point-of-need financing, which sits at the intersection of point of sale and fintech. He believes that businesses in today’s era are not required to be good but great if they want to be successful, and they are required to be great in all aspects, namely, marketing, technology, underwriting, and risk mitigation.

Concha started with a company called 1800mysurgeon that matched cosmetic surgeons with consumers. After starting the company, he realized the need for financing as an important part of the business. He decided to create a platform to interact with both surgery and finance to enhance the merchant’s experience.

LendingPoint’s Emergence In POS Lending

LendingPoint started as a direct consumer online lender specializing in 600-700 FICO score customers. Lorimer emphasized that the company understood very early that customer experience is crucial to POS transactions. Although the players in the market now are very good at generating products that banks like to own, they do not necessarily focus on the merchandise. LendingPoint simplifies the lending process by sharing risk and administering payment plans. LendingPoint also offers merchants risk programs to extend in-house, end-to-end services.

Marketing With Established Merchants

All the banks playing in the market are working to deliver better services to customers in different ways. The biggest players historically are Wells Fargo, Citigroup, and Synchrony Financial. They all have significant relationships.

The question is whether these big banks can be a part of this game. Concha believes that banks are an important part of the ecosystem. These banks are good for purchasing loans but are constrained by reputational risks, marketing, and other issues. Lorimer added that LendingPoint also works with some established banks. Talking of the role of hard pull and soft pull in availing credit, he shared that because a hard pull impacts the credit report of the customer, it is a cause for low approval rates. Soft pulls, on the other hand, do not affect the credit score of the credit seeker leading to a higher approval rate for loans.

Garrity shared his point of view on the tie-ups with established banks and financial institutions that become balance sheet lenders. He said they are participants in securitization, originations, and selling. He believes there is clearly an opportunity for all the stakeholder businesses to grow. Online POS lending usually operates separately considering the fact that it is complicated and technology-driven. Banks are, therefore, slow followers of fintech companies.

The Technology Edge Leads to Domination

The next important aspect analyzed was whether it is the technology that enables online POS lending businesses to dominate the lending space.

Kalen believes technology is the most important element of this space. Concha believes this space is all about keeping merchants and customers happy and building long-lasting relationships with them in the process. Lorimer questions the integration of technology among banks and whether banks will be able to adapt to complex technologies. He believes banks aren’t set up to do that, but to deliver a mass homogenous customer service. Garrity, on the other hand, believes the less you see the technology, the more attractive it is; he also thinks it is better for the merchant to focus on increasing the business close rates.

Talking about data management, Lorimer believes technology definitely provides an edge to the business on the back end. The data is the source for everything and it is analyzed and configured to improve the experience. As technology enables automation and brings security, users can access everything at one place and find it already stored in the system.

Kalen agrees that technology is a boon for backend data management. He added to the discussion saying that the more established players have an edge as they have been in business for many years. They have been able to hone their skills over a period of time.

Concha also believes that technology will work for the POS lending as it is different from other businesses. There is a major role of risk, debt, and strong relationships in POS lending, and none of these can be managed properly without technology.

The Challenges of POS Lending

Technology, scale, and partnerships:
Kalen from Flexiti views POS lending as a very different business than retail lending. Getting customers and coping with technology are major challenges. Other challenges that non-bank businesses face are focusing on the scale. It is important for the business to look at the credit cycle and beware of fraudulent practices as it increases the scale of operations.

Credit cycle:
Being on the right side of the credit cycle is crucial to every lending business. The access to credit in the credit cycle determines the risk and therefore the value of the business. Businesses must prepare their strategies, keeping the future in mind.

Regulation:
Lorimer believes this space requires more regulation since the Consumer Financial Protection Bureau (CFPB) is not very active. Poor regulation and lack of control pose a major risk to the players in the market.

Availability of capital and credit risk:
Another challenge is the availability of capital to extend lending facilities. The fear of credit facilities drying up in a day also bothers businesses.

The Takeaway

Kalen has realized that success does not come easy. The companies in this space need to understand that a lot of lending capital is required along with an understanding of the tricks of the trade.

Concha believes it is a 3-step learning process where the business is required to go through a testing phase, an education phase, and an adoption phase.

With LendingPoint’s recent acquisition of LoanHero, it is comparatively a new entrant in the market.

The crux of the entire discussion is that POS lenders must be specialized to survive in the market. The business has to endeavor to offer value added merchant services instead of being a one-stop shop to be successful. There is a lot of room for growth provided one understands the complexities of the trade.

Author:

Stephanie Vaughan is vice president at  Allen TaylorPosted on Categories Alliance Data System, alternative lending, Analysis, balance sheet lending, Banks, CFPB, Citigroup, consumer lending, Credit, credit risk, Featured, FICO, Financeit, Flexiti Financial, instant financing, LendingPoint, LendingUSA, LendIt 2018, Online Lending, point of sale financing, point of sale lending, POS financing, POS lending, Regulation, Synchrony Financial, Wells Fargo

Key Factors Increasing Consumers’ Demand for Credit

consumer credit

Shift expanding the reach of tech-enabled lenders As the U.S. and global economies continue to expand and recover from the Great Recession of 2007-2009, the consumer, a key driver of the U.S. economy, is spending again and tapping into different types of credit. The rapid growth of online lenders, expansion of digitally enabled lending technologies […]

consumer credit

Shift expanding the reach of tech-enabled lenders

As the U.S. and global economies continue to expand and recover from the Great Recession of 2007-2009, the consumer, a key driver of the U.S. economy, is spending again and tapping into different types of credit. The rapid growth of online lenders, expansion of digitally enabled lending technologies (e.g. point of sale solutions at the home or online), and growth in lending to subprime borrowers are all catalysts for the rise in demand.

Furthermore, increases in M&A activity in the consumer lending space demonstrate that the consumer is back and ready to borrow. Just this year, Elevate Credit completed their long-anticipated IPO, ECN paid $304 million to acquire Service Finance, and Prosper announced a $5 billion loan program.

Total consumer borrowing, which includes both loans and revolving credit accounts, rose by $18.4 billion in May 2017. This rise in borrowing is the highest since November 2016 when it increased by $25.1 billion. Additionally, total household debt reached a record $12.7 trillion in March 2017 —  a $50 billion increase over its peak just prior to the height of the market in 2008.

The increase in demand for consumer credit in the U.S. is the result of three factors influencing the economy. We see these factors as key to expansion and further growth in the consumer lending segment:

1) Improved credit scores

Equifax, Experian, and TransUnion implemented a new credit rating process on July 1, 2017, which excluded certain civil debts and tax liens. As a result, FICO estimates that approximately 7 percent of consumers now have credit scores up to 20 points higher than they did previously. Many of those consumers who did not have the necessary credit score to access capital (loans, credit cards) now qualify due to higher FICO scores. This development, coupled with the general improvement of credit scores as bankruptcies roll off credit reports, will enable higher levels of consumer borrowing.

At the same time, many consumers who suffered through bankruptcies and foreclosures during the real estate collapse, which peaked in early 2010, are recovering from the blow to their credit. According to a recent report released by Barclays PLC, more than six million Americans will see personal bankruptcies disappear from their credit reports within the next five years. These consumers will soon have greater purchasing power through access to credit.

And finally, credit score education programs are proving effective at getting consumers to change behaviors that negatively impact their credit scores. FICO reports that its consumer education initiative, Open Access, now provides over 200 million consumers with free access to their credit scores and actions they can take to improve the score.

These factors alone will accelerate growth for prime consumer finance names such as Synchrony Financial and Ally Financial, but also for other companies including Elevate Credit, Prosper, and LendingClub.

2) Confidence in the economy is on the rise.

In March 2017, U.S. consumer confidence in the economy hit a 16-year high and has remained at elevated levels. This leap followed the election of President Donald Trump, whose pro-business and pro-deregulation agendas have experts predicting significant economic gains for the housing, job, and stock markets in the near future.

Furthermore, the Federal Reserve has raised interest rates only three times since the economic crisis, but now has plans to raise rates at least two — if not three — more times this year. The rise in interest rates is a key indicator of a successful economic recovery.

When consumers are confident that the economy is on an upswing, they often make large purchasing decisions again — buying homes, cars, and other substantial assets. Consequently, their credit needs increase, which contributes to the rise in demand for consumer loans. Consumers may also increase spending on smaller luxury items that require short-term credit, such as vacations and holiday gifts. We’re in the middle of vacation season now and the holiday shopping season is just around the corner. We anticipate increasing demand for consumer credit through the remainder of the year.

Companies that stand to benefit from the increase in consumer confidence and its subsequent positive effect on consumers’ demand for credit run the gamut from traditional banks; disruptive players in the online lending space such as LendingTree, Quicken Loans, and SoFi; and smaller “Main Street” businesses that are so vital to local economies.

3) Unemployment rate is declining.

The upswing in the economy has brought with it a welcome dip in the unemployment rate. In May 2017, unemployment hit a 16-year low of 4.3 percent. In the same month, disposable income reached an all-time high of $14.49 billion. Both of these numbers are highly influential on activity in the consumer lending space. After all, when more consumers are employed and potentially earning disposable income, their spending increases along with their demand for credit.

Also interesting from a lending standpoint is the creation of what experts are calling the New Middle Class, which has been caused in part by the gradual reentry of Americans into the workplace post-recession. This term applies to roughly 160 million consumers in the U.S. population, and describes the large segment of the population who were negatively affected by the financial crisis and now have near-prime or subprime credit as a result and will continue to have less-than-prime credit despite the changes in FICO score qualifications.

The New Middle Class have been largely underserved since the recession, but are gaining access to the capital they require as non-banks, online lenders, and fintech-powered alternative loan providers work to meet consumer demands. As this segment of the population’s credit needs increase, non-banks’ influence in the lending space is becoming increasingly significant. As of 2016, six non-banks — including Quicken Loans, loanDepot, and PHH Mortgage — were included in the top 10 largest lenders by volume; in 2011, non-banks made up just two of the 10.

Lenders Must Quickly Ready Themselves to Serve More Consumers

As demand for consumer credit increases, providing a highly efficient means of accessing that credit is important. Evidence indicates that the rise in demand for consumer loans and credit cards has created a unique opportunity for online lenders and other fintech-powered loan providers to meet the needs of this market — and that credit providers that leverage fintech to facilitate the application and approval processes can successfully compete with traditional lenders who still use time-consuming, antiquated processes. The door is open and the time is right for innovative solutions in the consumer lending space.

Author:

Written by Alex Koles, CEO of Evolve Capital Partners.

Alex Koles, Founder, CEO, Managing Director, Evolve Capital Partners Alexander Koles is a Managing Director and Founder of Evolve Capital Partners, based in New York City. He has over 14 years of investment banking and advisory experience working with regional and multinational corporations on merger and acquisition strategies and execution, restructurings, and complex financings.

Prior to founding Evolve Capital Partners, he worked at a number of leading investment banks in leadership roles focused on restructuring deals. His restructuring career began at BDO where he provided restructuring advisory and transaction services for distressed companies and their stakeholders, notably in the sustainability space.

He started his career at Merrill Lynch as an investment banking analyst in the corporate finance group.

Koles is qualified as a FINRA Investment Banking Representative (Series 79), Private Securities Offering Representative (Series 82) and Uniform Securities Agent (Series 63). He received a Bachelor of Arts in Economics from Macalester College in St. Paul, Minnesota.