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Lease-to-own programs a growing complement to retailers' co-branded cards

Large retailers with existing co-branded and private-label credit card programs have increasingly turned to a lease-to-own product offering in an attempt to tap what they consider to be an underserved market.

Best Buy Co. Inc. officials during a Sept. 25 investor update detailed the goals of such a program the company launched earlier in 2019 in partnership with Prog Leasing LLC, which does business under the Progressive Leasing name. While the big-box electronics retailer derives about 25% of its purchase volume from a pair of cards issued by Citigroup Inc., it positioned the recently launched initiative as part of a broader mandate to capture new demand.

"Over one-third of the customers have challenges with the credit files they have today, and there are customers who simply don't have credit," Best Buy President and COO R. Michael Mohan said during the event. "Our Best Buy lease-to-own offer with no credit needed addresses both of these challenges." He added that millennials may be averse to traditional banking relationships, further contributing to the potential market for the program.

Progressive Leasing is a subsidiary of rent-to-own chain Aaron's Inc. Operating a virtual platform in partnership with retailers in the electronics, jewelry and home furnishings areas, Progressive Leasing's revenues and customer count in the second quarter both increased more than 19% year over year to $516.3 million and 909,000, respectively, according to Aaron's most recent earnings release. In addition to Best Buy, the company's retail partners include Signet Jewelers Ltd., Conn's Inc. and the Cricket Wireless subsidiary of AT&T Inc.

Signet's various brands, which include Kay Jewelers and Zales, offer private-label cards issued by the banking units of Alliance Data Systems Corp. Conn's offers a private-label card issued by the banking unit of Synchrony Financial. Alliance Data Systems officials have said in the past that they do not target subprime customers, but they have noted that the company does not rely exclusively on FICO scores in its credit decisions. Executives at Synchrony, meanwhile, have indicated that they prefer to focus on customers with FICO scores of above 620, subject to variance by the specific retail partner.

Traditionally, customers with FICO scores of less than 620 would be classified as subprime. Appetite for subprime business among card issuers in general and Synchrony specifically waned since the 2008 financial crisis.

Across the various programs, prospective Progressive Leasing customers need not have established credit to apply. Best Buy has specifically positioned its lease-to-own initiative as an option for those customers whose application for "primary financing," either in the form of the Citi-issued private-label My Best Buy card or the co-branded My Best Buy Visa card, has been turned down.

"No employee wants to tell a customer they've been declined for financing, [but] up until recently, that was literally the only option we had," Mohan said.

The Best Buy program is available on an in-store basis in 36 states, with nine additional states including New York and California set to come online by late October. It will be offered through BestBuy.com beginning in 2020.

Mohan characterized the lease-to-own program as being "relatively small" but "growing every month" at this point, bringing in incremental revenue without associated balance sheet risk. Nearly two-thirds of the customers using the program are either new to Best Buy or are "re-engaging" with the company, he said. A significant number of customers have been paying off the lease, set up to be 12 months in length by default, within 90 days. Progressive Leasing's least expensive buyout option expires 90 days after a leased product is delivered. Payments are automatically deducted from the customer's checking account or third-party credit card account.

Computing products accounted for the largest portion of products leased under the Best Buy program between March and July, according to the company's investor day slide deck. The customer mix skewed heavily toward millennials.

Since Best Buy uses a range of promotional financing options and offers enhanced rewards for the use of its private-label and co-branded credit cards, the lease-to-own option seems much more likely to complement those existing products than to cannibalize them. In fact, the availability of turn-down financing could provide new momentum to the Best Buy cards, Mohan said.

"We are seeing that our employees are more comfortable offering financing at large," he said in a development expected to increase the number of card applications they generate.