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Understanding these models gives a sense of the segments they target, the merchant and consumer needs they address, and business models banks and traditional lenders are competing with. POS financing for small and medium-size enterprises is ripe for growth, but we do not cover the opportunity in this article. The growth in POS financing for consumers involves five distinct sets of providers and models, each with varying strategies and value propositions (ExhibitВ 2). Five distinct offerings with integration across the purchase journey In the lower-ticket вЂњPay in 4вЂќ model, which allows consumers to split payments into four interest-free installments (for example, Klarna, Afterpay), usage is driven by consumers with lower credit scores, but even here, the low scores result from thinner credit files, not poor credit usage. As an example, Affirm is originating upward of $1В billion in loans at the exercise equipment company Peloton annually, with the portfolioвЂ™s average credit score at about 740.

Around 65В percent of total receivables originated by point-of-sale lenders are with consumers having credit scores higher than 700. Adoption across higher-credit customers is increasing as the credit mix is influenced by more premium merchants starting to offer financing at checkout. Far worse for banks, they are losing access to an acquisition channel with potential to serve highly engaged younger consumers.ДЄdoption of POS financing isnвЂ™t limited to consumers with relatively low credit scores. Consequently, banks have lost about $8 billion to $10 billion in annual revenues to fintechs. The growth is underpinned by increased consumer and merchant awareness and adoption of point-of-sale financing solutions.ДЇintechs are capturing almost all the value being created in POS financing because banks have been slow to respond. This is the only unsecured-lending asset class that has experienced high-double-digit growth through the COVID-19 crisis. POS financingвЂ™s expanding role in unsecured lendingД¬redit originated at point of sale is projected to continue its growth from 7 percent of US unsecured lending balances in 2019 to about 13 to 15 percent of balances by 2023, according to data from McKinseyвЂ™s Consumer Lending Pools (Exhibit 1). The insights are based on McKinsey research, including McKinsey Consumer Lending Pools (a proprietary database covering granular market size and growth trends), the McKinsey POS Financing Consumer Survey and POS Financing Merchant Survey, and our recent experience with banks and merchants. It provides an overview of the market, details key trends and factors influencing growth, and offers ideas for market entry for banks and partnerships for merchants. This article seeks to give POS financing players as well as merchants the necessary insights to refine their strategies in the POS-financing arena. To avoid that outcome, US banks need to understand the landscape for POS financing and choose from among the emerging models. Banks that underestimate the threat may see continued loss in share and could lose out on participating in a growing value pool and gaining share among younger and new-to-credit customers, as banks in Australia and China did when facing a similar situation. In our view, only a few banks are responding fast enough and boldly enough to compete. Thus far, fintechs have taken the lead, to the point of diverting $8 billion to $10 billion in annual revenues away from banks, according to McKinseyвЂ™s Consumer Lending Pools data. This article was a collaborative effort by Puneet Dikshit, Diana Goldshtein, Blazej Karwowski, Udai Kaura, and Felicia Tan, representing views from McKinseyвЂ™s Financial Services Practice.

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