If you type in “remote jobs” in Google Trends, you’ll see what looks like an exponential growth curve over the last ten years. While convenience and flexibility are often cited as reasons why many people seek freelance and other work-from-home opportunities, COVID-19 is driving one reason to the forefront: necessity. Dr. Brianna Caza, UNC Greensboro professor, has been studying resilience and the gig economy for eight years and says that the pandemic is forcing all workers “to be agile, adaptable, and find ways to grow from challenge and disruption.” With rising furloughs, layoffs, and job insecurity, Caza’s research is finding that more people who have not worked independently before are now exploring the gig economy as a means of supplemental income, and for some, alternative employment altogether.
While the estimates for the number of people in the U.S. that participate in the gig economy range anywhere from 1% to 40% of the American workforce, we can get a sense of those with non-traditional employment through data from the U.S. Bureau of Labor Statistics: over 25 million people are part-time wage workers and nearly 10 million people are self-employed. Altogether, approximately 25% of the workforce most likely doesn’t receive a regular paycheck.
In other words, there are at least 35 million adults in the U.S. that need banking products that are flexible enough to accommodate their irregular incomes, and based on Caza’s research, that number is likely to grow over the next few years.
Bringing the Branch to the Checkout Line
Point-of-sale financing, also known as point-of-purchase financing, alt-credit, or buy-now-pay-later, allows consumers to get financing for the goods and services they need to purchase without having to leave the physical or virtual checkout line. While this concept has been around for many years, more fintechs are entering this space and making it easier for professional services providers and retailers, selling everything from appliance repairs to ziplining excursions, to act like a bank for their customers. And customers are making use of these financing options: A Forrester study found that 32% of sales would not have occurred if retailers hadn’t offered financing. Another study on healthcare found similar results: 37% of patients would have foregone treatment if patient financing was not available to them.
These and other studies reveal that traditional lending products like credit cards leave a credit gap that point-of-sale financing can fill. A global lending report found that it’s more than just having access to credit for gig workers and traditional workers alike: Consumers want more flexibility than what credit cards provide. As a result, according to McKinsey, point-of-sale financing has more than doubled over the past five years and outstanding balances are projected to be at $162 billion by 2021, surpassing outstanding balances from private-label cards.
It’s no wonder that point-of-sale financing is quickly becoming a diverse ecosystem of loan servicing software providers, marketplace platforms, payment processors, banks, credit unions, and alternative lenders working directly or indirectly with retailers in sharing the risk and rewards of offering flexible payment options to consumers.
New product, old challenges
Banks and credit unions have several ways to enter this growing market, from being a lender to being an end-to-end solutions provider. A quick scan of recent press releases indicate that many seem to be favoring partnerships over direct competition with fintechs, regardless of their point of entry. While working with fintechs can address many of the operational risks of point-of-sale financing, banks and credit unions still need to effectively manage the same risks that are found in their traditional lending products.
A recent survey of 700 bank executives found that fraud detection, application speed, and risk assessment were top concerns as well as finding enough customers that meet their lending criteria. Fintechs may be able to help banks and retailers with delivering a seamless experience to consumers, but they may not necessarily be able to help banks and retailers continually make prudent credit decisions.
For example, one of our strategic partners enables healthcare providers to offer second-look financing to their patients. Their technology is designed to deliver an adaptable, streamlined loan origination and debt servicing process to providers. However, their technology lacked flexibility in the area of model management: They could not easily recalibrate their proprietary underwriting model, let alone build new ones to accommodate the various needs and risk propensities of their growing healthcare provider clients. In order to gain that capability quickly, they partnered with us at Enova Decisions to develop and deploy multiple fraud and credit models.
New opportunities ahead
In a previous article, I discussed how agility is not inherent in efficiency and with COVID-19, the need for flexibility in managing credit decisions is more crucial than ever. Taking a forward-looking approach to operations can help identify specific areas where agility needs to be designed into a solution.
For example, if automation of back-office processes is a major initiative for a bank, that bank must go beyond assessing what infrastructure is necessary to automate current processes by evaluating how effective that infrastructure would be at handling changes to those processes in the future. Or, in terms of improving credit decisions, banks and credit unions should not only be finding data that can improve the accuracy of assessing default risk, but also be identifying indicators that predict behaviors after initial default, including likelihood of curing, lifetime value, and impacts on the overall portfolio.
Ideally, individual credit risk should inform portfolio risk and vice-versa, and both risks should be priced into the financing offers. Earlier this month, we sent out a Consumer Lending & Financial Sentiment Survey to examine how banks, credit unions, and other financial institutions are managing fraud, credit, and portfolio risk since COVID-19.
I’ll be presenting key findings from that survey in a webinar next month, and will discuss how a forward-looking approach to consumer lending and financing operations will enable lenders to profitably grow their market share in a manner that increases access for consumers to more flexible financing options.