Point of sale credit has its moment as a crisis hedge
A mix of consumer debt and economic anxiety is shining a light on firms that offer alternatives to revolving credit. This, in turn, creates a chance to further tie financing directly to checkout.
Companies like Splitit, Affirm and Klarna have different models, but all approach consumers with an alternative to revolving credit card debt for larger purchases at the point of sale.
Splitit reports 165% year over year growth in April, and a 153% jump from March to April in volume. Klarna reported a 16% weekly jump for the final full week of April for online warehouse volume, with similar weekly jumps dating to late March — just before most of the U.S. went under lockdown.
The amount of personal debt is expanding, including the potential for an added $3 trillion in credit card debt in the U.S. alone during the second quarter, according to the Federal Reserve Bank of New York. This approaches the same level of debt during the 2008 financial crisis, which partly gave rise to the point of sale credit industry.
“Things are highly uncertain for people both financially and healthwise,” said Brad Paterson, CEO of Splitit. “This is a way for budget management and a way to put control back into consumers’ hands.”
Point of sale credit, or installment payments at the point of sale, were originally popular in emerging markets, and the model has expanded to more mature markets in recent years. Klarna and Affirm both drew nine-figure VC investments in late 2019 to build markets in the U.S. and Australia.
Splitit struck a deal in February to be Stripe’s payments facilitator. That Stripe deal allows a broader set of merchants to onboard themselves, according to Paterson. Splitit in the past year has also moved into B2B payments, providing another business line for the company as businesses attempt to shore up supply chains disrupted by the crisis.
Splitit’s model differs from the other point of sale credit companies in that it uses consumers’ existing credit cards to support the installment payments, which are paid directly to the merchants. Klarna, for example, recently acquired Italian fintech Moneymour to bolster underwriting and product development.
“Since we’re using installments for credit cards at the point of sale, that means consumers can use a credit instrument they already have. They don’t need to reapply,” Paterson said.
As consumers have moved spending online, they’re also making different purchases, which have larger prices than typical e-commerce sales. Splitit over the past six months has focused more on verticals such as home and outdoor goods, categories that are seeing more attention from online shoppers as a result of the lockdowns. The average purchase for homewares, for example, is about $755, which Splitit contends can be an easier sell online if an installment payment is part of checkout.
“Cart abandonment is a top issue for e-commerce merchants, and price is a large part of that,” Paterson said.
Klarna’s analysis found home and garden items, such as furniture, tools and home improvement, pet supplies, kitchenware, plants, flowers and cleaning products grew by 40% among Gen Z shoppers in the last week of April, with lower-single-digit jumps among Gen X and millennial shoppers.
David Sykes, head of Klarna U.S., said the company reached an all- time high in monthly shopping through its app. "This increase in usage is an example of the current circumstances accelerating online trends we were already seeing prior to the crisis," Sykes said.
Affirm recently entered into an agreement with Walmart to provide point of sale credit and play a role in Walmart's broader e-commerce strategy. Klarna's recent moves include accessing Amazon Web Services to develop on-demand products through the cloud.
Point of sale credit firms are similar to fintech lenders in that most of the companies were created or have had most of their expansion after the 2008 crisis, so their risk models are untested during a downturn. Fintech lenders mostly use future payment flows to pay down business loans, while point of sale credit firms enable zero-interest installment payments that are more directed toward consumers.
The point of sale credit model is in a relative good spot in the crisis.
“Stay-at-home consumers are relying on e-commerce, not only because non-essential stores are closed but also due to online shopping being on a growth path,” said Ray Pucci, director of merchant services at Mercator, adding alternative lenders will face “major headwinds'' as overall payment flows slow and economic uncertainty lingers. “So alternative credit providers such as Affirm, Klarna and Splitit are well positioned to capture online buying.”