As checkout loan startups like Affirm, Klarna and Bread garner funding and grow relationships with retailers, banks are putting up a formidable line of defense. Their pitch to retailers is their resources, data and brand recognition.
Over the past two years, Providence, R.I.-based Citizens Bank has built up its presence in the point-of-sale loan arena. It is Apple‘s bank partner for its iPhone upgrade financing program (a tie-up launched in 2017), and the bank is expanding its point-of-sale loan product’s reach into other areas of retail, including home improvement brands and security companies like ADT.
To Citizens, point-of-sale loans are a big market opportunity with good revenue prospects, despite the competition from startups. The bank’s differentiator, explained Andrew Rostami, Citizens’ executive vice president of unsecured lending, is its long-held expertise and line of sight into the customer’s bigger financial picture, along with the ability to partner with fintech companies wherever possible.
“It’s like having the cutting edge experience that a fintech would offer, but having the resources, the analytics, the credit, the oversight and the capabilities of a bank,” Rostami said. Citizens works with fintech companies as part of its point-of-sale loan product offering, but the bank wouldn’t name any companies that are its partners.
According to Citizens, the economics of point of sale loans are attractive because of the multiple revenue streams they can generate. Revenue models depend on the retailer. Some retailers subsidize the interest customers may have to pay, while in other cases, customers pay no interest because the merchant pays the bank the interest revenue over the life of the loan. By way of comparison, other point-of-sale lenders use a revenue model based on a cut of the transaction cost, as is the case with Australian point-of-sale loan company Afterpay, which charges 4% to 6% of the cost of the transaction.
Beyond revenue from transactions, point-of-sale loans also offer a customer acquisition benefit for the bank. “If you’re really targeted about it, it’s a great financial value to the bank, as well as having strategic [customer acquisition] benefits,” said Rostami, noting that point-of-sale loans are an entry point for the bank to suggest other products to customers based on their financial situations. Citizens’ technology also enables retailers to let customers make more than one purchase on a single line of credit with one monthly bill — a big improvement on branded credit cards, he added.
According to Craig Focardi, senior analyst at Celent, the advantage banks have over startup loan providers is the network of services and marketing capabilities they can deploy as needed. “Financial institutions like Citizens Bank have a complete operation for sales, marketing, back office systems and product account servicing,” he said. To stay competitive with startups, banks need to continually work on making sure the customer experience is as easy and seamless as possible.
When asked if point-of-sale loans are fueling unnecessary consumer purchases, Rostami countered by saying the bank has safeguards in place to ensure customers aren’t borrowing beyond their means through the loan pre-qualification process (he declined to say whether this is a hard or soft credit assessment). “You have to do it in a responsible way,” he said. “We don’t just look at one part of the equation like your credit score. We view the ability to pay as really important, and we have policy and a lot of intelligence around it.”