How lease-to-own can be a buy now/pay later alternative for the underbanked

Lending options at the physical point of sale are going to play a significant role in how consumers take part in a post-pandemic economic recovery. But as with many payment methods, they risk leaving out the underbanked.

One alternative is the lease-to-own option, which provides immediate lease payment options for those with limited or no credit history.

"These consumers need liquidity and they need access to make larger purchases," said Jason Hogg, executive president of Acima, a Draper, Utah-based company that provides lease-to-own services. "What they don't need is to be laden with more debt."

Merchants who add any type of payment option to the POS or e-commerce checkout can generally expect to see an increase in transactions.

"For any retailer, that is the whole reason for complicating the payments mix or acceptance basket, as you are trying to close a sale that you might not have without another payment type offered," said Richard Crone, chief executive of San Carlos, Calif.-based payments consulting firm Crone Consulting LLC.

"Lease-to-own is an interesting concept and what makes it fly is you have both sides of a two-party market," Crone added. "First, you have merchant acceptance, but second is a willingness on the part of consumers to sign up for this option instantly."

The challenge for those in the lease-to-own space is making sure they are transparent about every aspect of the payment process and the option to halt payments because they are competing with providers who do, Crone said.

"In many ways, it really is a loan just packaged differently, maybe not based on interest percentage rates, but it would include some premium payments," he added. "BNPL processes are completely transparent or borrowing from something like an Apple Card provides a graphic that shows exactly what you pay at each percentage level."

Acima, which operates as a division of Rent-a-Center, provides the lease-to-own option with a premium payment to initiate the transaction at various retailers — auto supplies/tires, furniture, electronics and others. It is also working to establish a cash-payment option via a mobile app for consumers making their monthly payments to the retailer.

Other companies, like Divvy, have used the rent-to-ownership model in real estate, in part to give home ownership opportunities to those who have jobs and income, but not necessarily a financial nest egg or strong credit history in order to purchase real estate.

"In this era of fintech innovation, any idea that monetizes the value of an individual person, their integrity and reliability or their work ethic and business potential — and not just their inherited wealth or ill-gotten gains — is going to race to daylight," said Steve Mott, principal of th consulting firm BetterBuyDesign. "It liberates the one-size-fits-all myopia of legacy retail banking."

In the same way BNPL's quick rise came about because it essentially established a counter to credit cards during the coronavirus pandemic and resulting economic chaos, the lease-to-own option has a path for those who otherwise could never consider a larger purchase.

It's also counterproductive to try to pigeonhole consumers into specific categories and speculate on what is holding certain segments back from using traditional financial tools, Acima's Hogg said.

"It's convenient for people to say the unbanked don't trust banks, but it's not accurate," said Hogg, who noted that earlier in his career he developed the prepaid program for American Express that eventually became Walmart's Bluebird alternative banking program. American Express had acquired Hogg's previous company, Revolution Money.

"The reason this segment doesn't have bank accounts is they can't afford the fees or they don't have the certain amount of money needed to open an account. It's a vicious cycle," Hogg said.

In addition, because they generally live paycheck to paycheck, the unbanked cannot build up a balance in a savings or checking account, Hogg said. "It's untenable."

With the mass proliferation of mobile devices and access to smartphones, there is an option to reach the unbanked with payment offers and quick onboarding at the point of sale or online, with instant acceptance of terms through a mobile app.

"We have the medium now to reach this segment of the consumer market and, from there, we can begin to build services around that," Hogg said.