Lease-to-Own Puts Durable Goods in Reach for Ineligible BNPL, Other Credit Borrowers

Millions of people with poor credit or no credit can be thought of as the “invisibles” of retail commerce, whose options for buying many items were extremely limited, until recently. The rise of buy now, pay later (BNPL) installment payments is bringing millions into the credit world — but not everyone qualifies.

That’s where lease-to-own (LTO) enters the frame as another preexisting form of installment credit that’s benefiting from a digital makeover, providing another way for those without credit — or who don’t wish to use the credit they do have — to make larger purchases on installment terms.

In a recent conversation with PYMNTS CEO Karen Webster, Orlando Zayas, CEO at Katapult, compared lease-to-own (LTO) with the BNPL juggernaut, noting that “unfortunately for most consumers, [BNPL] really only works for smaller purchases. If you go to a larger purchase, you're going to have to look for an installment loan or something like that to spread the payments out a little longer. While many companies have been doing it for many, many years … they don't satisfy all consumers.”

The new study, "Retail’s Invisibles: Leveraging Flexible Digital Payments to Reach Underserved Durable Goods Customers," a PYMNTS and Katapult collaboration, found that some 79 million consumers have an interest in, or have used, lease-to-own. The percentage of people earning six-figure incomes who have used or would use LTO may be somewhat surprising to the credit-aware crowd, but not to Zayas.

“It's expensive to live today, especially if you're in New York City, like I am today, and a $100,000 [salary] doesn't go a long way,” he told Webster. “If your refrigerator breaks down and you don't have the capacity on your credit card, you've got to get a refrigerator within the next day or two. It really helps those people who are struggling, and even if they make over $100,000 a year, might not have the capacity on their credit card to get those needed items … in durable goods” like major appliances.

Sticking with the refrigerator example, Zayas told Webster, “they could have gone to a furniture [store or] used appliance store, and hopefully that thing works. But it might not have a warranty. It's not the model that fits just right in their kitchen. We give that consumer the same choice that a prime consumer gets with the lease-to-own option.”

Read the study: Finding Retail's Invisibles

Getting Merchants' Buy-In on LTO

With pure-play FinTech BNPL brands generating headlines for the past few years, consumers with blemished or bad credit are often shocked that they don’t qualify. That’s where LTO comes in.

As Zayas explained, it begins with onboarding often doubting merchants who may have already turned down these same consumers for a store-issued credit card. Webster asked how those discussions go.

“The first question I ask them is who their prime lender is and what their approval rate is. Usually, they'll say somewhere around 50% to 60%, and I say, ‘well, what are the other 40% to 50% of the people doing, and what are their options?'” Often, Zayas said, the last resort for that consumer is rent-to-own.

Half-joking, he said that route often ends up with a choice of “a canary-yellow or an avocado-green refrigerator because those are the only two in stock, not the white GE refrigerator that [the consumer] wanted. So, the first question I ask is what do the turndowns look like? And then we talk about a waterfall, where the prime declines [come] to us instantly, and we have a program where we already do that now with many of the prime lenders through integrations.”

In this way, LTO saves the sale while creating a satisfied and loyal new customer in the process.

“Our retailers have found that [LTO] brings a very loyal incremental customer. Because again, they're probably in desperate need of that item, and they're able to fulfill that item, take it home today, and know exactly what they're going to pay and when they can pay it off early. We have really strong early payment options, which we encourage to get to ownership as quickly as possible. That's created a real loyal customer.”

Zayas said Katapult averages 1.95 leases per customer, with returns “in the low single digits.”

“That means they're happy with what they're getting, they pay it off early — we try to encourage them to do that — and they have that loyalty to the store. They're coming back to that merchant over and over again, because they feel like they were treated with dignity and respect.

“We talk to merchants all the time. They're skeptical at first, they don't understand it. We'll walk them through how we treat our customers,” he said. “We're excited that merchant acceptability has changed. I think there's a sea change in what the merchants are seeing. With somebody like us who treats the customer with dignity and respect, it's very clear and transparent, and [LTO] aligns with many of the financing options they offer today.”

See also: Katapult CEO: Lease-to-Own Plans Offer Non-Prime Alternative to BNPL

LTO and BNPL: A Dynamic Duo of Installment Payments

With BNPL generating billions in incremental sales, Katapult saw the writing on the wall; it teamed up with BNPL FinTech Affirm two years ago to help sub-prime shoppers not leave empty-handed.

As Zayas told Webster, “We have a partnership with Affirm, and we have a waterfall where with certain merchants ... somebody applies for Affirm, the application comes to us automatically, and we hopefully give the customer an offer.”

Affirm and Katapult also have a “graduated” offering, where lease-to-own customers who establish reliable repayment patterns on LTO terms can be stepped up to BNPL status.

Zayas said, “If customers who are declined [by BNPL] and leased with us paid really well, we're going to share that data with Affirm so they can offer them an installment loan and go to many retailers. This is at the heart of the company and my personal mission. I want to give the consumer the best choice of financing for their credit situation at the time. If they've built a really good payment history with us, and we share that with Affirm and Affirm makes them an installment loan and they become an Affirm customer, I'm happy with that.”

Katapult’s own approval rate for LTO applicants “is in the high seventies” percentage-wise, Zayas said, based on “very little data, usually the last four of their social, name, address and that's pretty much all you're going to get. We use AI and machine learning to build our algorithms to find behaviors that point to a customer's repayment history, and those algorithms have gotten better over time. I can tell you that two to three years ago, we didn't have that kind of approval rate, and now we do.”

See also: 75% of Lease-to-Own Consumers Say It Puts Durable Goods Within Reach