Point of Sale Finance Market Insight Report 2019
This report focuses on the UK market for point of sale, or POS, finance.
Also known as retail finance, in-store credit or store instalment credit, 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 estimates and 5-year forecasts.
The report quantifies the market size in loans outstanding, new lending and loan provider revenues, historical growth rates and levels of industry profitability. It also includes an in-depth analysis of the relevant drivers of industry growth setting out historical trends and available forecasts.
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 alterative 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 future growth can be forecast? What are the risks to future market growth?
– What hard evidence is there to support views of historical and forecast POS finance market growth? What are the POS finance market drivers and how have they trended?
– 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?
Point of sale (POS) finance – also called retail finance, in-store credit or store instalment credit – refers to fixed-term loans provided by, or on behalf of, a retailer to enable a consumer to make a specific purchase.
At present, 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 with an APR of 15-20% being typical.
Market growth and drivers
The market for POS finance has grown quickly in recent years with new lending now over £6bn per year. The combined revenue of leading lenders approached £750m in 2017
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 has recently increased significantly.
-The appetite of consumers for purchasing the kinds of items which tend to be financed in this way, which is likely to be related to the overall level retail sales but with more of an emphasis on discretionary purchases (big ticket leisure items) and furniture
– Consumer confidence in driving larger, discretionary purchases
– The overall performance of the economy as a driver of both retail sales and consumer confidence
– The availability of this form of credit, influenced to an extent by overall unsecured consumer borrowing levels
– 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.
The market consists of retailers, broker platforms and lenders.
In addition to most large retailers in the relevant retail sectors, around 9,000 independent retailers, including online-only stores, currently offer POS finance.
Key lenders dealing direct with retailers include Barclays Partner Finance. Close, BNP Paribas (Creation), Hitachi Capital, Ikano Bank and recent entrant, PayPal Credit.
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. Others may extend the credit themselves but use finance company partners to administer the agreement.
Broker platforms include Deko (Pay4Later), V12 (part of Secure Trust Bank), Klarna and Divido.Some platforms now introduce a retailer’s customers to a single lender, although new entrants appear to be reviving the approach of matching customers to a suitable lender from their panel.
Lenders operating mainly through broker platforms include Conister Bank, Honeycomb, Lending Works, Omni, Paybreak and Secure Trust (via V12).
Amazon has tested POS finance in the UK and is considered likely to add POS credit to its payment options for larger purchases in the medium-term.
Most operators have grown in recent years. 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 increased again last year however.
The outlook for the market remains positive despite expectations for overall economic growth and hence, consumer appetite for borrowing and retail spending, having been revised downwards in the last couple of years
We see the key risk to the market being if, as a result of high inflation or otherwise, interest rates were to rise significantly. As well as potentially damping down demand, this could also lead to retailers without FCA authorisations, who are only able to offer exempt credit, having to suspend their POS solutions.
Other key risks to market growth include UK macroeconomic performance in particular if there is a disorderly Brexit, a significant fall in the housing market reducing demand for big-ticket purchases, the development of new potential substitutes given UK fintech innovation and possible further regulation of POS finance products.
Who is the report intended for?
Operators of point of sale businesses themselves
Investors in these businesses
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
Market forecasts have been constructed using simple assumptions which are clearly stated. Supporting evidence is provided for our assumptions but readers can flex them where required to model alternative scenarios.