The payoff in splitting payments

With rising interest rates roiling “buy now, pay later,” there’s an alternative way to break up a purchase into manageable payments: lease-to-own or rent-to-own agreements. As the fintech industry refocuses on customers who are feeling less flush, the decades-old business model is reemerging as a possible solution.

There are reasons lease-to-own hasn’t captured the buzz of “buy now, pay later.” It carries with it a somewhat unsavory history and potentially higher costs for consumers.

• Under a lease-to-own agreement, a customer pays for a product in monthly lease payments, with some portion of the payment going toward owning the product. After a period of time, customers have the option to purchase in full or continue with their monthly payments until the end of the lease term.
• Retailers like Rent-A-Center and Aaron’s developed a poor reputation for selling low-quality products at high markups. Predatory rent-to-own agreements in the housing sector targeted low-income people of color. States have stepped in to regulate lease-to-own agreements, and four states outlaw them all together: Minnesota, New Jersey, North Carolina and Wisconsin.
• Lease-to-own agreements are regulated in slightly different ways in each of the 46 states where they’re permitted. Transparency is also key for legal compliance: The FTC brought charges against rent-to-own company Progressive in 2020, for example, for deceptive marketing. The company was required to pay $175 million to settle. “Deceiving people about cost strikes at the heart of the FTC Act,” an FTC analysis of the settlement reads.

The “buy now, pay later” sector is facing headwinds, potentially opening up opportunities for a different approach. Consumers have less money to spend on big-ticket items, and rising interest rates are hiking the lending companies’ borrowing costs.

• That adds up to rising delinquencies, higher costs of operation and slimmer profit margins. According to The Wall Street Journal, 3.7% of Affirm customers were at least 30 days overdue on a payment in March this year, compared with 1.4% in March 2021. Yields on the company’s securitized offerings have risen sharply from a year ago.

Fintech entrepreneurs say that technology can make lease-to-own more efficient, transparent and flexible. “Programs like ours which give customers flexibility and benefits are going to become more prevalent,” says Neal Desai, CEO and co-founder of lease-to-own startup Kafene.

• Most of the lease-to-own innovation in recent years has been in the area of home ownership, with companies targeting subprime borrowers who may not otherwise qualify for a mortgage. Divvy, ZeroDown and Verbhouse are just a few. Adena Hefets, CEO and co-founder of Divvy Homes, told Money in April that about half of its customers are able to buy back their properties.
• Kafene targets customers who would not qualify for “buy now, pay later” loans. Like the pay-later companies, Kafene partners with retailers, but makes money off of markups on the products rather than merchant fees. Customers can buy themselves out of a product’s lease early if they have the funds, saving money on an additional markup.
• Delinquency is uncommon under the lease-to-own model, Desai said, because customers who find themselves unable to continue with payments can return the item at no cost.
• Ohad Samet, CEO and co-founder of debt collection startup TrueAccord, argued that lease-to-own operations are not delinquency-proof. His company performs collections for several, he says. Lease-to-own serves a “small sliver of the market,” he said, and should be seen as “another avenue to acquire consumers and underwrite them.”

Still, the appeal of a recession-proof business model is likely to draw entrepreneurs. Though some are still bullish on “buy now, pay later” in a recession, it’s unclear how rising rates will pressure the business. According to Fitch Ratings, the credit quality of pay-later loans is “yet to be tested.” Competition from lease-to-own startups may provide another test.

— Veronica Irwin (email | twitter)

A version of this story first appeared on Protocol.com. Read it here.

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On the money

On Protocol: Binance.US CEO Brian Shroder isn’t worried about crypto winter. In fact, he told Protocol, the U.S. arm of the crypto exchange is set to announce more funding in the next month or so to gear up for growth.

New York City Mayor Eric Adams is raising money from crypto execs. After calling for Gov. Kathy Hochul to veto a two-year bitcoin mining moratorium, Adams held a fundraiser in the Hamptons with a number of crypto executives, reportedly focusing on how he wants to make the city a crypto hub.

Also on Protocol: BlockFi secured a $250 million revolving line from crypto giant FTX in order to “navigate the market from a position of strength,” with CEO Sam Bankman-Fried saying that they felt an obligation to step in “to stem contagion.”

Shopify is betting on NFTs to change the way people shop. Shopify is taking a step further with NFTs. After introducing the ability for merchants to sell NFTs last year, the ecommerce giant is now letting merchants use NFTs for their customers to unlock special products, perks and experiences.

Uniswap Labs acquired NFT marketplace aggregator Genie. The acquisition will allow users to buy and sell NFTs directly on the Uniswap web app, with plans to integrate NFTs into Uniswap’s developer APIs and widgets.

BTC Markets scored a financial services license in Australia. While crypto companies aren’t required to have a license to operate in the country, BTC is the first crypto exchange to obtain one, with the approval coming after a lengthy two-year waiting period.

Overheard (Elon edition)

Elon Musk had a lot of different things to say to the Qatar Economic Forum Tuesday. The 20-minute interview with Bloomberg ranged from his shaky deal to acquire Twitter to whether America faces an imminent recession. (Surprise, surprise: He said it’s “inevitable.”) But he also made time to name-drop one of his favorite cryptocurrencies, dogecoin.

“I have never said people should invest in crypto,” he asserted in response to a question about crypto market instability. “I personally support dogecoin because I just know a lot of people who are not that wealthy who have encouraged me to buy and support dogecoin, so I’m responding to those people,” he added.

That’s technically true: Musk hasn’t directly told people to “invest in dogecoin,” at least publicly. But it’s hard to believe Musk doesn’t know exactly how influential his “personal support” of dogecoin is on the token’s price. Dogecoin’s price jumped 11.7% on Sunday when Musk tweeted that he “will keep supporting dogecoin.” It jumped about the same amount after his interview Tuesday, too.

And many of his tweets have been taken as a cue to invest in internet dog money. He once said he set up “doge mining rigs” for his children, and invested in doge for one of his children with the musician Grimes. And if Musk making investments for his children isn’t enough of a ringing endorsement, he’s also said SpaceX would put the cryptocurrency “on the literal moon.”

Uneasy investors can find more consistent advice in another billionaire tech founder: Bill Gates. “My general thought would be that, if you have less money than Elon, you should probably watch out,” the crypto skeptic cautioned in a Bloomberg interview last year.

Deal flow

Roxe, a blockchain payments startup, has agreed to a SPAC deal that could value it at $3.6 billion. It’s agreed to merge with Goldenstone Acquisition Limited. The deal, if approved by shareholders, would give it a listing on the Nasdaq as ROXE.

Able.ai, which provides technology to large banks for facilitating commercial loans, raised a $20 million series A round. The company exited “stealth mode” in a round led by Canapi Ventures.

New York startup Wahed raised $50 million in series B funding led by Wa’ed Ventures, the venture capital arm of the Saudi Aramco Entrepreneurship Center. The startup helps Muslims avoid investments in alcohol, tobacco, gambling and other funds misaligned with the faith.

Auxilius, which provides financial accounting software for clinical R&D, raised a $10 million series A round. Renegade Partners led the round, with participation from Bain Capital Ventures and XYZ Venture Capital. Several individual angel investors also participated.

Logistics payments startup PayCargo raised $130 million in a series C funding round. The company provides real-time invoicing and reporting for companies shipping products via air, ocean, trucking and rail.

Pakistani fintech Dastgyr raised $37 million in the country’s largest-ever series A funding round. Its products connect retailers with their suppliers, expediting the restocking process.

Kinly raised $15 million in a series A funding round led by Forerunner Ventures. The neobank aims to serve Black millennial women, and launched its app the same day it made the funding announcement.

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