Almost a century ago, when the U.S. economy began to show signs of recovery after the initial shockwaves of the Great Depression, General Electric launched a point-of-sale lending product to provide cash-strapped customers with installment loans so the manufacturer could sell its product. 

“Since we spun out of GE Capital five years ago, we’ve just continued to expand that thinking and really think in a more liberated sort of point-of-sale finance approach as a business,” said Neeraj Mehta, CEO of payment solutions at Synchrony Financial, a consumer financial services company that offers various point-of-sale lending products to its more than 75 million customers. “Point-of-sale financing is just trying to meet the customer at the moments that matter in their consumer journey and allowing them to transact at any point … We started way back then in the ’40s but as times evolve, point-of-sale financing is a lot more than just installment loans,” he said.

Point-of-sale lending has received a fintech makeover in recent years, with lenders and direct-to-consumer companies flocking to the space — and the results are resonating with consumers. With promises of a financially healthier alternative to credit cards for consumers as well as increased adoption and basket size for merchants, fintechs and banks alike are racing to get a foothold in this growing business line.

“We’ve seen the point-of-sale landscape continue to grow and evolve year over year,” said Erica Novick, head of consumer lending for BBVA USA. “[We] will definitely continue to invest in this space as we build around our core and potentially partner with others to go to market.”

Winning consumers over and changing behavior in the long term, however, won’t be an easy feat for U.S financial institutions. In a country where credit cards reign supreme as a payment method, and with a COVID-19 recession looming over the economy, point-of-sale lending could take years to gain a real foothold in America.

A growing frontier for banks

Point-of-sale lending will certainly be playing catch-up in the U.S. According to the American Bankers Association, U.S. consumers had 372 million open credit card accounts as of the end of 2019. Nevertheless, point-of-sale lending is on an impressive growth trajectory. 

According to research from McKinsey, outstanding balances originated at points of sale were expected to surpass $110 billion last year as of November 2019, up from $94 billion in 2018. “This volume has more than doubled between 2015 and 2019, and has taken three percentage points of growth from credit cards and traditional lending models, worth more than $10 billion in revenues,” the report read. Financial institutions are taking note.

“POS financing is experiencing a growth rate that is far outstripping credit card payments for purchases right now — if you had to point to one metric, it would be that growth rate versus the growth rate in credit card payments that probably has a lot of us sitting up straight in our chairs,” said a top banking executive at a large financial institution, who asked not to be named.

Point-of-sale finance has ridden the tail winds of an e-commerce boom that took hold in the U.S. as shelter-in-place orders spread coast to coast. An expected 18% increase in U.S. e-commerce sales, according to an eMarketer report earlier this month, is likely accelerating lenders’ move to the digital market.

Despite the 10.5% drop to $4.9 trillion in retail sales anticipated by eMarketer analysts this year, point-of-sale lenders are bullish on being insulated from the impact because of the diversification typical of a point-of-sale portfolio. For instance, while spending within the travel industry has largely come to a stop, other verticals — like home improvement and technology — have seen a spike, buoying the asset class for lenders, according to executives at Synchrony and Affirm, a direct-to-consumer point-of-sale lender.

BBVA USA is using this financing to reach consumers seeking in vitro fertilization treatment through a partnership with Univfy, which uses AI technology to help patients. The expensive treatments are often not fully covered by insurance, making financing an attractive option. As for the future of point-of-sale financing during the current pandemic, BBVA’s Novick said there is a lack of useful historical data, but she doesn’t see online spending — and the need to finance those purchases — disappearing anytime soon. 

“We believe, with the right fraud and risk controls, addressing the right verticals will provide profitable growth opportunities for the bank and needed solutions for consumers,” Novick said.

Meanwhile Synchrony, which has financed more than $149 billion in sales, will be focused on building out its product offering, which encompasses different models of point-of-sale lending such as private label credit cards, promotional financing, dual cards, co-branded credit cards and network cards. As a company, about half of Synchrony’s portfolio is made up of “big ticket financing,” as the acquisition hook, Mehta added.

“The more product choices you give the consumer, the more consumers you’re going to attract,” Mehta said. “And that’s got to be in all channels, so as you think about when you’re in the store, when you’re on your couch or when you’re on the move, we want you to be able to have those transactions anywhere you can and that’s something we really see as the vision.”

Citibank is also wading into the space with its Flex Pay solution, which allows customers to pay credit card purchases off in a series of installments. Mike Naggar, chief digital officer for Citi’s U.S. consumer bank, said lending will be a prime area for innovation as the U.S. recovers from the COVID-19 pandemic. Citizens Bank, meanwhile, offers point-of-sale financing through Apple and ADT Security Services.

While point-of-sale lending seems to have a place in the U.S. market, it might struggle to create the same lasting customer relationships for banks as other types of loans, according to Leslie Parrish, senior analyst at Aite Group. 

“Does a consumer appreciate the fact that a bank is financing their purchase and want to deepen that relationship by opening an account or using them for another loan?” Parrish asked. “Or, do they only remember the retailer?” 

Banks would be best-served to target consumers with good credit profiles but who generally avoid credit cards, she said, because these consumers might dislike the idea of revolving debt and prefer the built-in discipline of regular payments for a finite period of time. 

Though, from a banking perspective, the value proposition of point-of-sale may fall with the commercial banking client, and not the end-consumer. 

“You might get exposure to an asset class you’re interested in, but it seems unlikely you’re going to establish some strong relationship with that customer,” said the same unnamed executive. “The relationship you’re actually going to deepen the most, if you’re going to offer a point-of-sale solution as a bank, is your commercial or small business relationship with a merchant who wants their customer to have that financing option. That, to me, is where the real relationship value comes in, on the business side and not on the consumer side.”

Fintechs make their move

The potential for point-of-sale lending has created a crowded field of fintechs attempting to capture the market. 

Afterpay, an Australian company that launched in the U.S. in 2018, has 5 million U.S. customers, surpassing its number of Australian and British customers. According to co-founder and CEO Anthony Eisen, Afterpay doesn’t have to convince U.S. consumers to give up credit cards because it’s happening naturally. “We’re seeing this huge customer shift that already existed,” Eisen said. “You can see it at a headline level.” According to research from Afterpay and Morning Consult, 56% of Gen Z and 32% of millennials say they “never” use a credit card.

Meanwhile, San Francisco-based Affirm has experienced “exceptionally strong” growth in finance volume, “not quite doubling year over year,” according to Geoff Kott, Affirm’s chief capital officer. The e-commerce boom that has accelerated amid the pandemic and social distancing has provided a lift in business for the 8-year-old company. 

“This is moving from something that was either an afterthought — or frankly not that large of a market —to something that will continue to receive greater adoption as folks look at this as a safer way and a way to frankly better align with their economic household,” Kott said. “All trend lines are pointing up and to the right.”

Fintechs facilitating point-of-sale finance are also catching the attention of larger financial institutions and investors. Sunnyvale, Calif.-based ChargeAfter recently scored an undisclosed investment from MUFG Innovation Partners, as the Japanese bank and startup explore further partnership opportunities. ChargeAfter uses a marketplace model to connect a network of lenders and merchants with consumers for financing at checkout. The startup has 12 U.S. lenders on the platform, including Synchrony and Genesis Credit, and has secured investments from BBVA and Visa. 

According to ChargeAfter CEO Meidad Sharon, financial institutions are bullish on point-of-sale for several reasons. One is access to a digital presence. “They want to become a digital bank and be able to be digital and meet the consumer at the digital space,” he said. Another is a new channel for customer acquisition for lenders that service the loans after origination. And, lenders can access global scale via a network of international merchants. 

“In point-of-sale financing, the consumers are not going to the bank to apply for a new credit card. They are going to the store to buy something and a byproduct of that, because they want to finance the product, is the banks are meeting a new consumer if they’re able to provide attractive enough terms,” Sharon said. Year over year, ChargeAfter has experienced a sharp 300% increase in finance volume running through the platform, he added.

See also: Afterpay taps Marqeta to fuel US growth strategy

To keep the image of a healthier alternative to credit cards, point-of-sale providers must ensure consumers avoid the same traps associated with cards. Although installment loans are often considered safer than revolving debt, late fees and interest rates, combined with increased purchasing, could spell trouble for consumers. 

“Regulators have started asking questions, particularly around the ease with which people can access this method of credit,” said Sarah Kocianski, head of analysis and research manager at the fintech consultancy 11:FS. She added that, for banks entering the market, their products need to be better than fintech competitors already in the space, and they must act quickly before other banks make their move. Regardless of the headwinds, point-of-sale lending faces, she doesn’t see it fading.

“The rate and scale of adoption suggests that this is much more than a flash in the pan — indeed for some it is now the only way they purchase anything online,” Kocianski said.