Point of Sale Finance Market Insight Report 2021
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 estimates.
The report quantifies the market size in loans outstanding, new lending and loan provider revenues, historical growth rates and levels of industry profitability.
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?
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.
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 with an APR of 15-20% being typical.
Some retailers offer both fixed-term, product specific POS alongside revolving credit such as store card accounts
Until recently, purchases needed to be over £200in value for POS finance to be viable, given fixed set-up costs. But, in the last couple of years, there has been growth in smaller and shorter-term interest free offers, with minimums as low as £30.
Market growth and drivers
The market for POS finance has grown quickly in recent years with new lending having approached £15bn in 2019.
The combined revenue of leading lenders was around £1bn in 2019
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 recent launch of interest free ‘split payment’ facilities
– 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.
Prior to the COVID-19 shutdown, our expectation was for growth in the market to continue but at a slower rate than in the past, with the key threat being a rise in interest rates.
– Timing of interest rate rises is impossible to predict, but the Bank of England had clearly indicated that it expected the direction to be upwards.
We also identified several other factors which represented risks to market growth. These included:
– The then-predicted softening in the UK economy with likely negative impact on retail sales
– Potential for future regulation to designed to dampen down credit-driven retail sales growth
– Risk of significant disruption from a no-deal Brexit
However, the COVID-19 pandemic and consequent closure of much of the economy means our thinking on forecasts no longer applies.
COVID-19 has led to closures of most high street retailers and a significant reduction in overall retail spending and, in particular, large discretionary purchases.
A consequence of this is we expect that, when data becomes available, we will see that there have been much larger movements in many drivers of the market in a short period than there had been in the past few years of relatively normal conditions.
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