This week the largest conference in the peer to peer/marketplace lending industry, LendIt 2016, is going on. In the days leading up to the conference, I got the chance to speak to lots of movers and shakers including platform operators. One of the most interesting lending platforms out there is a new area for p2p lending but one of the oldest forms of financing, POS financing or financing at the Point of Sale.
How many of you are old enough to remember when stores used to do lay away? The store would hold an item off to the side in reserve and payments would be made in installments until paid off and then the item could be picked up at the store. This was a great way for families to hide gifts from nosey kids like me. You can't find the gift if it's still in the store.
If you haven't heard of layaway, how about the furniture ads of 12 months same as cash or no interest due until year 202_? If any of this sounds familiar to you, then you know POS financing.
Both Lending Club and Prosper have a financing service in this area, in medical services, mostly for elective surgery with Lending Club Patient Solutions (known as Springstone) and Prosper HealthCare Lending. For other consumer facing services like furniture, appliances and home improvement there is a new leader, LoanHero. I got to talk to Derek Barclay, LoanHero's CEO just before the conference and here's some cool stuff I learned.
LoanHero was created specifically to address the merchandising channel (that means at the point of sale) and to solve the problem many marketplace lenders face: the cost to acquire new borrowers.
As Derek told me, the financing options at the POS are incredibly limited as good credit options ended up generating so many credit declines for less than good credits that most retail stores resort to the the most expensive/poor credit options to finance everyone. These include options like Rent to Own or No Credit Check financing. The upside to the retailer is everyone gets approved. The downside is the good credits pay the same high rates as the lesser credits.
If that doesn't sound right to you as a potential borrower, you're not alone.
Derek thought this was crazy too so LoanHero was created as a hybrid platform (my words not Derek's). The good credits are approved and funded through the marketplace lending methods we are all familiar with although LH only works with institutional lenders, mostly banks and credit unions. The hybrid part is that the lesser credits like No Credit Check options are then brokered (sold) directly to firms who already specialize in this type of financing and are looking for more loan volume.
This is a very smart strategy. Marketplace income and impact for good credits and fee income from brokering.
How It Works
Like most online lending platforms, there's an online application and since there are many loan options from internally funded and sold to a bank to brokered out loans, the convenience of one place to apply is great for borrowers and retailers alike. LH has their own credit underwriting team and pulls the Experian credit bureau report and makes the decision of what grade loan it is and which set of buyers to present to loan to for sale. LH has their own risk based pricing model based on credit quality.
They fund off of their own balance sheet and sell off the entire loan to the finance companies or the banks and credit unions. An interesting twist compared to other platforms is that buyers must buy the entire loan.
Markets and Terms
Terms go from 1-5 years with the 5 year option being the longest term offered. According to Derek, the average term is somewhere in the middle at 28-30 months.
The biggest markets are medical devices, furniture, home improvement and auto repair although these are not their only markets. Their website gives a more exhaustive list.
Derek shared a big announcement with me that they signed a national agreement with AAMCO to provide financing options to customers that come in for a new transmission or other services AAMCO provides.
Not only is this AAMCO opportunity big for LH, Derek said he believes that the franchisor/franchisee model (like AAMCO) presents one of the biggest growth opportunities in the POS world as franchisees are often looking for options for financing for their best customers.
I am really impressed with what LoanHero is doing and the only thing that I heard that I didn't like was that I can't invest on their platform unless I choose to start an institution of some kind. POS financing is one of the oldest forms of finance and now the newest form of finance, marketplace lending, is helping to move POS financing into the 21st century.