Lease-to-Own Plans a Boon to Merchants and a Lifeline to Strapped Consumers

There’s a huge difference between the big-ticket items we’d like to have (Teslas) and the items we need to have.

Right now.

The fridge conks out. The cat shreds the couch beyond all recognition. That new job you just got demands that you have a laptop leagues beyond that 7-year-old Dell your older brother gifted you once he didn’t need it for grad school.

In the paycheck-to-paycheck economy — that’s 62% of us right now — most of us don’t have enough money to plunk down for a new fridge. Most of us find that splurging on a new couch may be out of reach.

In fact, recent PYMNTS research finds that nearly half of consumers would not be able to afford a $400 emergency.

Read here: 50% of Consumers Earning $100K Now Living Paycheck to Paycheck

In an interview with Karen Webster, Orlando Zayas, CEO of lease-to-own (LTO) platform Katapult, said that there’s a growing mismatch between circumstances and financial capacity.

“Regardless of whether you want these items, you will absolutely, positively need them at that moment,” he told Webster, “which makes the situation for those who have trouble getting financing even harder.”

When those emergencies happen, those of us living paycheck to paycheck need a solution.

LTO, he said, offers a lifeline to huge swaths of the U.S. consumer population — promoting financial inclusion for those of us with thin or no credit. It will likely be embraced by prime borrowers who are being shut out of traditional lending products as companies tighten underwriting standards.

Inflation, after all, hits everyone, and sends us all scrambling for new ways to more evenly match cash flow to the demands of everyday life.

Trouble is, LTO is less than well understood by consumers, and merchants, said Zayas, which means that individuals miss out on a new option that can help them get what they need, and merchants miss out on sales.

LTO simply means that consumers recurring payments — with instant approval online for purchases as high as $3,500 — and typically, over 12 months, own the bed, the computer, the washing machine at the end of that term.

They have no long-term obligation to continue leasing, and, via the platform model, if they should fall behind on payments, can return the product to Katapult at any time with no further obligation other than for any amounts past due.

They can also return the products before the financing term is over — but most people don’t.

“We have a very small amount of returns,” he told Webster. “And even if it’s a situation where the consumers are having trouble making payments we try to work with them, we give them that return option, but we never force them to return an item.”

Awareness and Acceptance

The greenfield opportunity for LTO is there, said Zayas. After all, 60% of consumers who bought durable goods last year used financing or leasing programs for at least one purchase. But only 11% of respondents to a recent PYMNTS survey said they use lease-to-own financing, which makes it the least common financing option.

The lack of penetration is “mostly an awareness” issue — and he noted, too, that the option is not readily available with every retailer.

“Many people do not realize this option even exists,” he said.

The LTO model is emerging and evolving away from the widely held perception that only a limited number of retailers — with relatively lower-quality merchandise — offer that payment option. Previously, going to the rent-to-own store would have been a somewhat dismal experience: You got to choose between the green couch or the blue couch.

For the retailer, he said, there exists the opportunity to serve a customer in a new way — getting incremental business that might not have been available before. In fact, past research done jointly between PYMNTS and Katapult has found that there would be a 25% “lift” in terms of consumers who would buy more if there was a LTO  opportunity available at their favorite retailer.

“Retailers are awakening to the possibilities,” he said. He told Webster that companies that were not interested in knowing more about LTO back in 2013 (when Katapult launched), now are finding the time to consider, and integrate LTO into their payment stacks. In part that’s due to the fact that so many companies have done the technical heavy lift of upgrading their payment and checkout capabilities during the pandemic.

Maybe there’s a misperception on the part of the retailers, according to Zayas: They need to realize that LTO customers are not actually credit risks or individuals who cannot make good on their financial arrangements — they are simply seeking new ways to optimize cash flow.

The retailers, he said, have the misperception that the customers are not shopping on their sites or shopping in their stores.

But the reality, he said, “is that these retailers have people walking around in these firms’ stores, gazing at what they have and walking out because they have no way to pay.” Integrating the LTO option is not a technical heavy lift, said Zayas — it simply requires integrating with the site.

The time is ripe for merchants to look at LTO as a payment option, he said. Even in the prime lending market, he said, there are 50% to 60% approval rates, which of course indicates that a significant percentage of people are getting declined.

“The people who are getting declined,” he said, “are the people who need these items the most.”

As inflation increases, as the economy tightens, he said, prime lenders will tighten their activities even more.

“That’s where the lease-to-own model really excels,” he said — giving a lifeline to the customers that would have qualified for prime offer a year ago, but now find that access cut off. As those traditional lending conduits dry up, he said, more customers will gravitate to Katapult’s platform. He said that even amid the uncertain economic climate, Katapult’s customer base is resilient — so much so that the company has not had to make significant changes to its underwriting activities.

The average term duration is about seven months, which indicates that a significant percentage of borrowers pay off their items early.

That quick cycle, said Zayas, enables Katapult to be nimble with its underwriting: If the firm has to tighten up quickly because the economy goes further south, it can do so. Past may be prologue, he said, because during the last recession (in the early days of the pandemic), the company had new business generated from top credit tiers.

Looking ahead, he said, Katapult will look to add more retailers. The company recently added Wayfair, for example. He said that the platform continues to see repeat business, with fertile cross-selling potential. The person who buys a new Lenovo laptop through a lease to own arrangement may well be comfortable enough to use that option to buy a sofa or other household items down the line.

For the retailer, he said, “lease to own brings them a whole new customer and drives incremental business, and that customer is going to come back time and again.”