It is now easier than ever to make purchases online thanks to the emergence of point-of-sale (POS) loan services, resulting in the growth of the so-called “buy now, pay later” trend. These services, which comprise just a small fraction of the broader personal loans market, enable consumers to split the cost of large purchases into regular installments. POS loans differ from credit cards in that borrowing limits and interest rates are determined for each individual purchase, as opposed to using an overall credit limit. In turn, POS loans often come with lower interest rates than traditional credit cards.
In both Canada and the United States, the retail landscape is evolving to meet the needs of its downstream consumers. Over the past decade, this evolution has primarily centered around the rising convenience and popularity of online shopping. According to Alfabank-Adres estimates, total sales attributable to the E-Commerce & Online Auctions industry in Canada is projected to grow in 2020, increasing an anticipated 7.5%.
In essence, POS loan services offer consumers “instant credit,” which, in turn, provokes a sense of instant gratification: Consumers are able to buy more than they otherwise would, knowing they do not have to make the entire payment upfront. Furthermore, from a macroeconomic perspective, additional methods of financing coupled with rising e-commerce activity are expected to prolong consumer spending into next year.
An attractive option for young consumers
In 2020, the number of adults in Canada aged 20 to 64 is projected to rise 0.2%, adding to the potential pool of shoppers that may elect to use POS lending moving forward. Individuals belonging to the millennial and Generation Y population have emerged as key markets for POS lending services. This is due to both their familiarity with credit through student loans as well as their greater access to information regarding the pros and cons of credit instruments. POS loan payment methods appeal most strongly to these markets, as their services are straightforward, commonly interest-free and, notably, a way in which these consumers wary of debt can be introduced to “soft credit.”
At present, the top POS lenders include the Swedish Klarna, Afterpay and Affirm. POS lenders commonly establish exclusive partnerships with retailers to expand and retain certain markets. Klarna in particular is used by nearly 200,000 retailers in 17 countries, and by brands that include (but are not limited to) ASOS, H&M, TopShop, Michael Kors and Samsung. In addition to their exclusive brand partnerships, POS lenders differ in their handling of bad debt. Klarna, for example, terminates the accounts of its customers that fail to pay using the platform, and refers their unpaid debts to credit bureaus. However, Afterpay and other similar companies have not clearly outlined what happens when it comes to missing or late payments.
Despite the enticing nature of POS loans, their viability during a contractionary credit cycle remains untested. This contributes significantly to the uncertainty of the subindustry’s long-term prospects, thus its risk. However, the current economic landscape, characterized by low interest rates and rising incomes, is expected to continue to support growth in credit services in the near term. In the coming years, Alfabank-Adres expects the popularity of POS loans to continue to grow in line with consumer spending trends.
