Many consumers are opting to take out point of sale loans instead of using credit cards. Learn why and what this trend means for the consumer lending industry at large.
When you spend your time worrying about compliance, it can be easy to forget that regulations aren’t the only driving force in the consumer lending industry. Credit products evolve not only in response to the decisions of federal and state legislators, but in accordance with the changing needs, tastes, and preferences of another, perhaps more powerful group:
Consider, for instance, the new trend of point-of-sale lending. Instead of using credit cards to finance their purchases, many consumers—particularly younger consumers—are now opting to take out dedicated personal loans offered during the checkout process. To keep up with demand, numerous banks and financial technology companies have developed offerings that allow borrowers to secure credit instantly, at the moment of purchase. These POS loans are frequently smaller and shorter-term, and carry higher interest rates, than their traditional counterparts.
What’s behind the trend? According to a recent article in American Banker, consumers want less risk, more convenience, and greater flexibility—but there’s a deeper emotional component, too:
“In 2016, Affirm conducted a survey of more than 1,000 consumers ages 22 to 44 to gauge attitudes about consumer credit. Most said that they fear debt and nearly half said that they enjoy some purchases less if they are still carrying a balance on their credit cards.
Perhaps most tellingly, 87% of respondents expressed an interest in paying for large purchases via monthly installment loans and the bulk of those respondents said that the most appealing aspect of an installment loan is knowing exactly how much they will owe and when, including interest.
Americans still love their credit cards, as evidenced by the fact that card debt outstanding is now at an all-time high of $800 billion, according to the Federal Reserve Bank of New York. Yet the number of active accounts is well below pre-crisis levels, a clear sign that many consumers are trying to avoid revolving debt. In its research, Fifth Third [Bancorp] found that millennials in particular dislike carrying credit card debt but have little problem taking out a loan to pay for a specific product or service, such as a laptop or a vacation.
‘There is a natural psychological affinity within this group for credit products with a purpose,’ [Fifth Third EVP Tim] Spence said. ‘That was a big “aha moment” that drove us to offer a financing solution at the point of need.’”
This story is a great illustration of the interplay between consumers, laws, and financial institutions, and demonstrates that no one interest dominates the others. The financial crisis of 2007–2008 led not only to the creation of new laws and agencies (most notably the Dodd–Frank Wall Street Reform and Consumer Protection Act and the Consumer Financial Protection Bureau), but changes in consumer perception of credit. Lenders are contending with the new landscape by introducing new products and technologies, which cause their own ripple effects.
To stay innovative and competitive, lenders need to proactively use their time strategizing rather than putting out fires and struggling to remain in compliance. That’s why financial institutions and credit companies of all sizes choose to implement Compli’s automated workforce compliance solution.
Want to see it in action? Learn more about Compligo for consumer lending.