Point of sales (POS) financing is one of the most sought-after ways for a user to finance their purchase. In fact, a survey conducted by Mckinsey shows about 60% of users say they are likely to use POS financing over the next 12 months. Banks have offered POS financing for a long time now, but have failed to upgrade their tech and improve customer journeys to enable a better user experience.

Initially, POS financing was also largely limited to the purchase of high-priced merchandise, usually capital goods. The growth of e-commerce and specifically direct-to-consumer business models have propelled the demand for small ticket size purchases as well. This was the starting point for many BNPL providers, who initially focused on small ticket size purchases. They focused their entire efforts on building an effortless customer journey. They built a simple user interface and reduced all friction in the onboarding process.

This transformation of the customer journey now emerged as a billion-dollar opportunity that enabled users to avail credit with a click of a button. BNPL service providers have focused their efforts on one or multiple of these segments to create and build their respective value propositions.

Embedded shopping stores

BNPL service providers have identified various shopping categories with high spending volumes. Furthermore, they partnered with these in-demand stores to bring them under one roof via a super-app. So now, it is a one-stop solution for users to get the credit service and, at the same time, use their credit to shop on the BNPL marketplace with their favorite brands. This has not only improved the customer experience but also helped merchants achieve higher revenue.

This is one of the most dominant models. We’ve discussed this model and its features thoroughly in one of our insights, which you can dive into here.

Card-linked financing

This offering is a prevalent form of POS financing with credit cards. BNPL now allows users to convert their regular purchases to 0% EMI. This is usually done with high-ticket purchases with an added benefit of reward points or merchant-offered subsidies. Card issuers have always offered post-purchase EMI options, but their popularity against 0% APR BNPL payments was pretty low.  Card-linked BNPL gives more control to users by offering pre-purchase, at purchase, and post-purchase stages of transactions.   

Off-card financing solution

Off-card financing solution, unlike card-linked financing. It offers you credit with EMIs for the first few months at 0% APR and then has a subsidized APR. This service is available to high- to mid-ticket size items which have low frequencies, and such items usually require long EMIs ranging from 6 to 10 months.

Off-card financing is prevalent in the furniture, home improvement, fitness equipment, and travel industry. Usual users of this service have high credit scores, and thus the risk of default is much lower than other products offered. Merchants who observe high cart abandonment rates and huge customer acquisition costs offer these services to promote the purchase of their product with no major impact on user cash flows.

Rent-to-own model

This model is a boom for users with low credit scores, as it enables these users to avail credit for items they wish to own. The user gets the item on the day of the transaction, but the ownership lies with a service provider. As soon as the user completes all installments, the ownership transfers to the user.

This service does not have a 0% APR but rather carries a charge in the range of 1% to 5%. As per various reports, about 95% of consumers have a credit score below 700, and almost 70% of consumers have a credit score below 600. This validates the untapped potential this business model can unleash.

Vertical-focused large ticket size financing

BNPL started with financing small to mid-ticket-sized purchases with high frequency, but due to its efficient working model and viral popularity, few players started offering finance for vertical-focused high-value transactions. These transactions can range anywhere between US$2000 to US$50,000 and are offered in high-ticket industries like green energy, healthcare, and home improvement. The players in the market usually partner with major operators/equipment manufacturers to achieve high volume and maintain a viable profit margin. To deploy this model BNPL service providers have to assess their target markets and work relentlessly on their go-to-market strategy. This model is tricky to implement as banks also offer their services in high-ticket purchases, triggering a head-to-head competition between a BNPL operator and a bank.

Future outlook

Point of sales financing will become a mainstream way of financing purchases in the near term. Although the current adoption rate is growing slowly but is expected to accelerate soon. We already see banks, big-box retailers, and others making strategic partnerships with POS financing service providers to personalize their customer’s journey. BNPL service providers will soon provide sector agnostic credit and would further refine their credit distribution structure to match the users’ preferences.