Point of Sale Finance / Buy Now Pay Later Market Insight Report 2023
This report focuses on the UK market for point of sale, or POS, finance. Also known as retail finance, in-store credit, store instalment credit or Buy Now Pay Later (BNPL), it refers to loans provided by, or on behalf of, a retailer to enable a consumer to make a specific purchase.
This new edition of the report has been updated and extended to take into account recent growth in the market and to revise our market size and growth estimates.
The report quantifies the market size in loans outstanding, new lending and loan provider revenues, historical growth rates and levels of industry profitability. It segments the market between conventional POS finance and BNPL.
Objectives of the report
This report aims to answer a series of questions on the POS finance market:
– How does the market work? What changes have there been recently?
– What would be the impact of an interest rate rise?
– Which types of retailers use it most frequently?
– How does it compare with alternative and substitute forms of finance?
– What role has new technology played in the market?
– What is the market size and historical growth rate, in terms of total loans outstanding, new lending and lender revenues?
– What are the risks to future market growth?
– How does the market compare with those in other countries?
– Who are the main finance providers and principals, which are most widely used by retailers, how have they performed?
– In simple terms, what do they each do, who do they work for and how do they operate?
– What do the leading UK retailers do – to what extent do they use this form of finance, how do usage patterns vary by sector, which providers does each use and what is the extent of churn?
Market background
Unsecured consumer credit for the purchase of specific goods or services can be split between two key segments: Buy Now Pay Later (BNPL) and Point of Sale / Service (POS).
– BNPL: Interest-free split payments for up to around three months, termed Buy Now Pay Later (BNPL) finance. This is a relatively new part of the market having grown rapidly in the past three years.
– POS: Credit agreements typically of 12 months or longer.
It includes purchases of goods from high street stores and online as well as purchases of services from medical, beauty or other providers
Many retailers choose to subsidise the cost of the credit as a promotional expenditure and offer “interest-free credit” or “zero per cent finance”.
It is used by both national retail chains and independent shops, most commonly in the home and furniture, jewellery and electricals sectors.
– Loans are generally set up as personal loans, not secured on the asset and without a lease arrangement.
– Interest-free loans are generally for 3-12 months with an APR of 0% (i.e. no additional fees are charged)
– Charged-for loans are generally for periods of 12-60 months. Where interest is charged, an APR of 15-20% being typical.
Market growth and drivers
The market for POS finance has grown quickly in recent years with total
outstanding lending having reached £12.5bn by the end of 2022.
The latest reported figures for combined revenue of leading lenders was around £1.5bn
It has been driven by trends in a range of demand and supply factors, including:
– Ongoing retail sales growth
– Growth of online sales, where POS penetration increased significantly during the pandemic.
– The rapid expansion of BNPL offers across a wide range of retail sectors that previously did not offer POS
– The overall performance of the economy as a driver of both retail sales and consumer confidence
– Pricing of POS finance loans, particularly the current wide availability of interest-free deals.
– The impact of technology on the market with new apps enabling far quicker decision-making and higher application acceptance rates.
– The impact of regulations on the market, including the need for lenders to take reasonable care to confirm that new lending is affordable.
Competitive landscape
The market consists of retailers, broker platforms and lenders.
In addition to most large retailers in the relevant retail sectors, around 15,000 independent retailers and service providers, including online-only stores, currently offer POS finance.
Our monitoring of POS solutions offered by the largest UK retailers finds frequent changes in both providers and terms of POS solutions being offered to consumers, although the rate of change slowed during the pandemic.
Key POS lenders include Barclays Partner Finance. BNP Paribas (Creation), Novuna (formerly Hitachi Capital), Ikano Bank, Omni and Rematch Credit (DivideBuy). BNPL providers include PayPal Credit, Clearpay, Klarna and Etika Finance (formerly Paybreak).
Some larger retailers provide the finance from Group companies, including Home Retail Group and Shop Direct (Argos), often alongside other payment options including store cards.
Deko, acquired by the owners of NewDay, provides an online broking service
Smaller brokers, including some new fintech entrants, tend to specialise in service sectors such as medical / dentistry treatments, flights and holidays and home improvements.
Lenders operating mainly through brokers or a growing number of fintech lending platforms include Conister Bank, Honeycomb, Tandem Bank and Shawbrook.
Aggregate margins across the sector grew steadily until 2013, but then fell for several years as firms adapted to deal with more costly regulatory requirements, including some cases involving customer remediation programmes. Profitability of POS providers has increased again in the last couple of years, but the fast-growing BNPL segment is loss-making.
Outlook
We expect further growth in the overall market driven by BNPL. The growth in BNPL is mainly a function of consumers who use these facilities using them for a greater proportion of their purchases.
The outlook for conventional POS is less certain, being a more mature product where the impact of the overall economy is more significant, with negative impact expected from:
– The cost-of-living crisis resulting in some consumers postponing larger, discretionary purchases of the type that would be well-suited to POS.
– Increases in interest rates making interest-free credit more expensive for retailers.
– Tightened affordability checks on new lending.
Other factors which could represent risks to market growth include:
– The continued deterioration in the UK economy and squeeze on household incomes
– Higher interest rates – especially if sustained for a long period – making interest-free credit more expensive for retailers, and leading to more retailers cutting back on interest-free subsidies (continuing a slow trend we have observed for several years)
– New regulation being tighter than currently expected by the market. This could take the form of greater requirements to confirm affordability of new loans and the removal of the current exemption that means retailers and service providers offering only interest-free credit for up to 12 months do not need to be authorised by the FCA.
Who is the report intended for?
Operators of point of sale businesses themselves
Investors in these businesses
Retailers
Market regulators and policymakers
Banks, analysts, consultants and other parties with interests in the sector
What are the sources and methodology?
– Interviews with senior-level contacts in the consumer credit industry
– Research into 50 top UK retailers and their use of POS finance
– A case study on retailers in the city of Salisbury
– Extensive research into published industry sources
– In-depth analysis of the macroeconomic environment and relevant market drivers
– Financial analysis of the accounts of companies in the industry
Information from these sources has been synthesised and presented clearly and concisely with extensive use of charts and tables to illuminate points and support conclusions