Increasing product sales has been a struggle for all retail businesses ever since the industry began, and it still is. In an effort to make their products more accessible, an increasing number of companies are starting to investigate alternate types of retail financing in addition to the rising adoption of “Buy Now Pay Later” programs. Because it boosts product sales without needing price modifications, retail financing is successful. However, just what is retail finance? How does financing for retail use work? This essay will look at retail finance’s definition, workings, benefits and drawbacks, potential benefits for businesses, and other topics.
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Retail finance: what is it?
The phrase “retail finance” refers to a broad variety of activities that are all ultimately focused on giving customers access to financing before the goods is ever delivered. Customers can therefore take the item home before it is paid for (either in part or in whole) rather than having to pay the entire amount before receiving their stuff. It functions similarly to providing a credit card substitute. “Point-of-sale financing,” or “PoS finance,” is a common term used to describe retail lending.
Retail finance comes in a variety of forms, and the kind used varies depending on the product and sector. Systems like as “buy now, pay later” are especially common in the retail sector and for smaller-value transactions. On the other hand, you are more likely to get an interest-free loan with monthly payments for a couch or a car.
Retail Financing Types
Numerous regulated and unregulated credit products fall under the category of retail finance. More than 150 businesses provide retail financing globally, each with a distinct offering.
Retail financing providers may be broadly classified into two types, despite their diversity:
1. Financing at 0%
The 0% financing option spreads out the cost of a product purchase over a certain amount of time and doesn’t charge interest. This type of funding encourages the company to increase sales without cutting expenses and is an excellent, low-cost choice for customers who do not have the cash on hand to make purchases.
2. Quick loans
At the conclusion of the loaning period, the whole loan amount—including any applicable interest—is paid back in one big payment with a bullet loan. Customers who are a little short on cash but know they will have enough by the conclusion of the loan period should choose this financing option. Again, because they encourage consumer spending, these loans are beneficial for retail businesses.
3. BNPL, or buy now, pay later
As mentioned before, “Buy Now, Pay Later” financial loans are becoming more and more common in the retail sector. As the name implies, this option enables customers to take items out the same day and pay for them at a later time that suits them. This “pay later” period is decided upon prior to the buyer making a purchase. The “Purchase Now, Pay Later” option, like most of these loans, allows clients to make purchases while they are short on cash, which boosts product sales for the business.
4. Applied interest financing
One of the most common loan kinds, “Finance with Applied Interest,” has a fixed monthly interest rate and is provided for a predetermined amount of time.
How does the business model for retail finance operate?
In traditional lending, borrowers must pay interest on their debts. Nonetheless, if the loan amount is little and the repayment period is short, point-of-sale financing is usually free.
How do the lenders make money, then, if the borrower isn’t paying interest?
The rationale is that a portion of the transaction value, often between 2 and 8%, is paid by the merchant to the lender. Additionally, merchants have the option to pay an installation charge in addition to a monthly membership cost (paid at the time they start up the retail financing program).
Benefits of Retail Financing
1. Establishes a difference from rivals
This is a simple strategy to use if you want to set yourself apart from your competitors—and who isn’t? You don’t need to worry about customers not believing these technologies because the big players have already made them popular (a huge initial obstacle for “fintech” services).
2. Most likely raising the pace of conversion
If you provide retail lending, your income will probably increase. Even while there’s no guarantee you’ll see a significant boost (especially if you sell to an older market or extremely inexpensive items), it makes sense to believe that a gain is probable.
The most important thing to do after implementing a retail finance option is to keep a careful eye on your conversion rate. It’s crucial to keep in mind that nothing should be taken for granted since, as everyone involved in e-commerce is aware, one person’s “sure win” isn’t always another person’s!
3. Possibility of increasing order value
As previously said, providing retail financing is likely to increase the average order value on your website, however this is not a given. Once more, it’s critical to monitor this throughout the next months. For instance, order values may increase but customer purchases may decline. It is imperative that the current data set be further examined.
The drawbacks of retail financing
1. Expenses and/or danger to finances
Every retail financing option has a cost, as we’ve already covered. These costs might take the shape of extra man hours and tech effort, financial risk, or a per-sale commission. Making ensuring the benefits exceed the drawbacks is crucial.
2. Relying on an outside party to give your clients a satisfying experience
You give up some control over the customer experience when you use a third party to handle payments. It’s likely that your customer will be less likely to shop from your website in the future if they had a poor experience with the retail financing provider. They could even ask for a refund or leave a negative review.
3. Consequences for ethics
Although this is a very personal drawback, we believe it is important to note. Although pay later services have been quite popular recently, there are good reasons to be concerned about their moral standing. They push people to live above their means and accumulate debt. The Financial Conduct Authority will now impose stricter regulations on pay-later businesses as a result.
