Point-of-sale (POS) financing for large consumer purchases is a potential $391 billion market that credit unions are ideally suited to, George Hofheimer, chief knowledge officer for the Filene Research Institute, told attendees of CU Direct Corp.’s Drive15 Conference in Las Vegas.
Finance companies currently dominate this market, providing 95% of financing for healthcare expenses, electronics, home goods, and other big-ticket items, Hofheimer says. And they’re richly rewarded for their efforts, earning average yields of more than 20%.
“Credit unions could come in and be market killers in this space,” he adds, by providing more affordable financing and leveraging their relationships with local merchants. “The real opportunity is in local and regional providers. They’re not being well-served by the big finance providers, which focus on the big box retailers.”
The Filene Research Institute conducted a study on the POS financing market and found that most consumers don’t know—or care—about the details of these financing arrangements.
“The consumer’s main priority often is making the purchase today,” Hofheimer says. “They don’t necessarily care who’s providing the financing, and they probably don’t understand the difference between closed- and open-end lending.”
While few credit unions provide this type of financing, he adds, those who are successful at it tend to have strong commercial lending relationships. “It’s a natural connection to help small businesses make more sales.”
Hofheimer cited several insights from the Filene report, “Blue Ocean Lending for Credit Unions: Point of Sale Financing,” including:
• Product design is key. A common element of POS products is a promotional 0% financing offer linked with an open-end solution, such as a credit card.
“With respect to the provider,” he says, “your product must be easily understood, and you need to make it easy for the provider to interact with the credit union through technology.”
• Consider underwriting changes. This market may require automated underwriting to ensure fast approvals. “The consumer wants financing today,” Hofheimer says.
• Accentuate pricing differences. Today’s dominant providers charge both providers and consumers “usurious” rates, he says. Credit unions can provide a higher level of service at a lower cost to both providers and consumers.
• Determine and ramp up business development capabilities. Like other indirect lending markets, credit unions will need to develop and nurture provider relationships in this market.
• Focus on untapped markets such as small, local providers in underserved industries, such as elective health procedures.
Hofheimer’s advice for getting started: “Start with one provider and focus on local businesses,” possibly by linking with local auto dealers to finance members’ vehicle repairs. “Credit unions have the local knowledge that the big lenders don’t have. Start slowly and people will start coming to you.”