Author: Jeffrey Tower

With consumer finance projected to reach $15 trillion by 2025 (GlobalData, 2021), stringent regulatory frameworks are needed to ensure stability and protect consumers. The rapid expansion of digital financial services, highlighted by the surge of point-of-sale financing, emphasizes the importance of robust regulatory measures. 

As banks expand their lending models and reenter the consumer financing market, their strict regulatory frameworks and compliance expertise provide a significant competitive advantage. Banks have been lending institutions for centuries, offering various loans including mortgages, personal, consumer, and business loans. Over the years, they have developed robust compliance processes and deep regulatory expertise, especially compared to fintech companies such as BNPL (Buy Now Pay Later) providers, many of whom are new to lending.

Regulatory Scrutiny in Consumer Finance

As the consumer finance sector has grown in popularity and scale, it has inevitably drawn the attention of regulatory bodies. Both the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (“OCC”) have issued guidance and reports related to BNPL lending, emphasizing the need for prudent practices and robust consumer protection measures. These regulatory efforts aim to address the increasing demand for consumer protection and financial stability in this rapidly expanding, unregulated sector. 

Banks, with their extensive history of adapting to regulatory changes and ensuring compliance, are well-positioned to navigate these new standards, in contrast to BNPL providers which have been functioning without regulation and are going to have to play catch up. Additionally, BNPLs lack direct access to funds via customer deposits and the Federal Reserve further strengthens the banks’ position.

Beyond Compliance: Deep Understanding and Capacity

Banks’ experience with regulatory compliance goes beyond merely following rules; it encompasses a deep understanding of the rationale behind regulations, such as protecting consumers, ensuring fair practices, and maintaining the financial system’s integrity. They can anticipate regulatory changes in response to external and other contributing factors, for example advances in technology or issues affecting the economy, and proactively adapt their strategies and seamlessly integrate new requirements into their operations. Additionally, banks have dedicated teams and systems to monitor regulatory changes, assess their impact, and implement necessary adjustments. This institutional capacity for regulatory adaptation is crucial in an environment where financial regulations are increasingly complex and far-reaching.

Building Trust Through Compliance

Banks’ adherence to regulatory and compliance standards and stability reinforce trust among consumers and merchants. This trust is crucial in newer financing areas like consumer finance, where customers and merchants are still gauging the credibility and reliability of different financial providers. Banks can leverage their compliance expertise to differentiate themselves and position their financial products as better, safer, and more reliable. By doing so, compliance becomes a key part of the value proposition that banks offer to merchants and their customers. 

Conclusion: Compliance as a Strategic Asset

The established processes for regulatory compliance in consumer financing are more than an operational requirement; with the introduction of regulations, it is becoming a strategic must. Fintechs and innovative financing models in the consumer financing space are under increasing scrutiny, while banks, with their long history and deep expertise in compliance, are uniquely positioned to navigate the complex regulatory landscape and provide a stable and trustworthy option for consumers and merchants alike. 

Jeffrey Tower

EVP Global Business Development

Jeff has over 20 years of experience driving revenue through building global brand awareness, business development, marketing, and sales departments focused on consumer financing, fintech, and eCommerce.

As shoppers increasingly lean towards flexible point-of-sale financing to pay for purchases and services, and merchants and other sellers seek the best way to meet this demand, the banking sector recognizes that it needs to expand its existing lending models and diversify POS financing offerings. This shift highlights that embedded lending is not just an emerging opportunity but a strategic necessity for banks to maintain their competitive edge.

The rise of embedded lending in point-of-sale finance 

Consumer financing at the point of need is becoming an integral part of the customer journey, impacting the customer experience, business growth, and sales revenue. Continued economic challenges, such as the cost-of-living increase, alongside the emergence of on-demand loans at the point of sale to meet this need  are changing how people pay for goods and services. In 2021, nearly 5% of U.S. financial transactions, totaling $2.6 trillion, were integrated into e-commerce and other software platforms, and this is set to reach over $7 trillion by 2026, according to Bain & Company. 

Fintech companies have led the way in the point-of-sale (POS) financing revolution, especially with the emergence of Buy Now Pay Later (BNPL) loans. McKinsey & Company estimates that banks have experienced annual losses of $8 to $10 billion to fintech players, representing not only a financial setback but also a loss of a vital customer base – younger, tech-savvy consumers. 

For banks, point-of-sale financing represents both a challenge and an opportunity. While this market has been dominated by fintechs, traditional banks and financial institutions are beginning to enter this market, and they do so with significant advantages. 

Strategic advantage for banks in POS financing

Banks and traditional lending financial institutions enjoy advantages over newer fintech companies when it comes to point-of-sale financing. These advantages stem from their established infrastructure and years of experience as lenders, positioning them to become the leading provider of POS financing services for merchants and their customers. These four advantages distinguish banks from the newer fintech companies that have more recently entered the market. 

1. Established customer base and trust

Merchants seek reliable point-of-sale finance partners. Banks are known not only for their stability and balance sheets, but also their competitive rates, and secure data handling, making them ideal partners vs. a fintech that is reliant on external investors to float loans. It’s not only merchants that seek a trusted partner, but consumer trust in banks is stronger than ever, with many customers preferring bank loans over fintech options due to their established reputation and reliability. Pattamatta & Dabadghao (2022), highlight the significance of this trust, particularly for newer consumer financing options like point-of-sale financing where customers often gravitate towards the familiarity and dependability of big established banks. This is not just a matter of comfort; it reflects a deeper understanding that banks offer a level of security and regulatory compliance that newer fintech companies may not have achieved yet.

2. Regulatory compliance and expertise

The role of strict regulatory frameworks in shaping the banking sector cannot be overstated. Over the years, banks have not only adapted to these regulations but have also developed robust processes for compliance, and the banks are the leaders in regulatory and compliance regulations to protect their customers. This deep-rooted regulatory expertise provides banks with a critical edge, particularly in a financial landscape where new regulations, especially concerning fintech and innovative financing models like BNPL (Buy Now Pay Later), are rapidly evolving and are still unclear. Banks on the other hand are highly regulated and their core business is lending under strict regulatory guidance. Banks are better prepared for mass consumer finance growth.

The point-of-sale finance sector, which has grown significantly in popularity and scale, has inevitably drawn the attention of regulatory bodies, including the Consumer Financial Protection Bureau (CFPB). The CFPB’s move towards establishing industry-wide regulations is a response to the growing need for consumer protection in this sector. Banks, with their long history of adapting to regulatory changes and ensuring compliance, are uniquely positioned to navigate these new standards and in large are already compliant as lenders unlike fintech BNPL providers whose expertise in regulatory compliance is a significant advantage over their fintech counterparts, many of which are still in the early stages of grappling with complex financial regulations.

3. Risk management and credit expertise

Banks’ proficiency in risk management and credit assessment plays a pivotal role in their ability to effectively navigate the point-of-sale finance landscape. Their established frameworks for risk management are the result of years of experience and refinement and enable them to adeptly handle the unique credit risks associated with these financing models. Jakšič & Marinč (2018) underscore the importance of this expertise, noting that unlike many fintech companies that are relatively new to the scene, banks have a long history of assessing and managing credit risk. This expertise is not limited to evaluating the creditworthiness of borrowers; it extends to developing sophisticated models that can predict repayment behaviors, detect fraud, and anticipate market changes that could impact the risk profile of their lending portfolios.

4. Stronger financial backing

The recent economic climate, characterized by inflation and rising interest rates, presents a challenging landscape for lenders. In this environment, some POS finance providers, often limited by their financial resources, have found it increasingly difficult to sustain operations. They face the dual challenge of adapting to market pressures while also trying to maintain competitive rates and services. In some cases, these challenges have led to the adoption of complex and costly measures to stay afloat, impacting both their stability and the quality of services offered to customers.

Banks, in contrast, have a more robust foundation to draw upon. Their financial backing typically encompasses a diverse range of assets and substantial capital reserves. This allows them to absorb market shocks and economic downturns more effectively than their fintech counterparts. In practical terms, this stability means that banks can continue to offer competitive rates and reliable financial products even in times of economic stress.

Banks as pioneers in point-of-sale financing

In 2024, banks have a golden opportunity to emerge as leaders in the POS financing marketplace. By leveraging their established trust, regulatory expertise, risk management and credit expertise, and strong financial backing, they are well-positioned to offer innovative and reliable financing solutions to merchants and their customers. 

Understanding and adapting to market changes allows banks not only to reclaim lost ground from fintechs but also to forge new paths in consumer financing. It is evident that embedded lending at the point of sale is not a fleeting trend – it’s a key aspect of the future of banking. With a comprehensive approach and strategic advantages, banks are poised to redefine the point-of-sale financing landscape, offering enhanced services that meet the evolving needs of consumers and merchants alike.

Jeffrey Tower
EVP Global Business Development
Jeff has over 20 years of experience driving revenue through building global brand awareness, business development, marketing, and sales departments focused on consumer financing, fintech, and eCommerce.