In line with our risk management framework, today we published our Q4 2019 performance update.
Is offering retail finance right for your business?
While it has held up better than expected over the past year or two, the UK economy and its macroeconomic indicators make for anaemic reading. Wages have barely grown in real terms since 2016, consumer confidence has touched record lows in recent times, and, while employment levels remain robust, the cloud of Brexit uncertainty threatens to undo much of this good work.
For the average consumer, it is not a backdrop which encourages big spending, and retailers have felt the brunt of it. In their latest report, the British Retail Consortium and accountancy firm KPMG revealed a drop in total sales growth to 0.5 per cent in the year to February for UK retailers, down from 1.6 per cent a year earlier.
Further details reflected a reluctance on the part of shoppers to purchase discretionary goods, while, excluding food shopping, high street sales fell by 0.4 per cent over the three months to February - representing below-average performance compared with the preceding 12 months. Even online sales, which have been the lifeblood of UK retail in recent years, experienced a slowdown in non-food items.
For retailers, it isn’t a set of figures which inspires much optimism. But the good news is that there are some powerful tools available to turn the tide, and one of them is retail finance, or point of sale (POS) finance.
How does point of sale finance help customers?
In a fast-moving world, customers increasingly expect a more dynamic set of payment options. Retail finance certainly fits the bill, in that it removes the deterrent of a significant upfront cost for shoppers, and allows them to sensibly pay off the price of the purchase(s) over a period of monthly instalments. In that sense, it may not sound too different to a loan or credit card. However, there are some fundamental advantages to the customer with respect to retail finance.
Instant decision – Approval happens there and then, at the point of checkout
Frictionless – No long application forms, nor piles of paperwork required
Affordable – 0 per cent finance is commonplace, while interest-bearing finance is competitive
Budgeting – Fixed, easy-to-manage outgoings each month
How does point of sale finance help retailers?
Any benefit to the customer is inextricably linked to the rewards reaped by the retailer, so, by offering such advantages, the outcome is an improvement in conversion. But the gains for retailers don’t end there – here are some of the other ways in which POS finance adds value to a retailer’s bottom line:
1) Boost to sales
It isn’t difficult to understand why retail finance provides such a fillip to sales volumes. After all, would you rather pay £600 for a new item of furniture such as a sofa upfront, or make 12 monthly payments of £50?
Framing the cost of an item in a more-affordable way is inclusive, as those with smaller disposable incomes don’t have the same barrier to buying. Equally, even for those with larger incomes, it often makes good budgeting sense to purchase goods with low-cost (or 0 per cent) finance.
Either way, the result, for you as a retailer is more and more sales, with no extra effort. According to IT firm Forrester, average sales increases as a direct result of retail finance are in the region of 17 per cent, while other studies put this figure even higher (in the vicinity of 40 per cent in some cases).
2) Increase transaction value
You’ve got a customer who’s ready to pull the trigger on a purchase, and, by offering retail finance, you’ve just minimised the initial dent to their wallet as a result. So, what does this mean? It means they suddenly have the firepower to fill their basket with more items, and you as the retailer are the beneficiary. The aforementioned Forrester research found that average order values in UK retail rose by 15 per cent for firms who offer POS finance.
3) Better customer retention
These days, it takes a lot more than simply having the best price to drive loyalty. Any customer who experiences a convenient, seamless journey, with the ease and affordability of paying through a slick retail finance option at checkout, will keep such a merchant at the front of their mind when the time comes to buy again. Furthermore, POS finance opens up your store to a broader audience, drives customer goodwill, and enhances your brand image as being a customer-friendly one.
What types of retail finance are there?
Retail finance continues to evolve, and currently comes in a number of forms. Among the most prominent are interest-free loans, whereby goods are sold on 0 per cent finance. Other common types include:
Deferred interest-free loans – initial payment-free period, followed by instalments with 0 per cent interest
Interest-bearing loans – interest included in monthly instalments
Buy now, pay later – pay for items at a later stage under agreed terms
Bullet loans – pay the balance of the purchase at the end of an agreed period
Although the above is not an exhaustive list, retail finance platforms in the UK tend to offer some variation of the above – either by virtue of plugins, or deeper API integrations with personalised customer journeys, and convenient digital payment systems.
Is retail finance right for me?
It may surprise you to find out that POS finance is already prevalent within a number of retail sectors. The list below illustrates some examples in which it has become particularly abundant:
Sports and Leisure
Car Extras and Repairs
Electrics and Appliances
Training and Education
Arts and Music
If your store operates within one of these industries, then that may be the first sign retail finance is a good fit. But there are some other things to consider too.
For starters, what is the average cost of the goods or service that you sell? If you’re in the business of distributing big-ticket items, then POS finance could be an invaluable way of attracting more customers, and improving conversion rates. Equally, if the bulk of your stock is made up of low-cost items, then it may be that setting up retail finance isn’t worthwhile, and could even eat into your margins.
Something you should do is review data relating to cart abandonment. Is there a high volume of customers who abandon their shopping basket? If so, at what point do the majority do so? If your research uncovers that this tends to happen at the point of checkout, then it’s highly likely that retail finance can help to get many of these customers over the line.
Additionally, it’s worth spending time analysing customer demographics, and customer behaviour on your site. If you can mine data such as average income, along with analysing heat maps, browser sessions and conversion at key touchpoints, you’ll start to form a clearer picture. For example, it may be that there are lots of exits once customers view the prices of items, particularly ones that have a larger upfront cost. If this is a recurring theme, then it’s a strong signal that offering POS finance options, and making them aware of it at an earlier stage in the journey, will improve sales.
Another vital consideration is whether the bulk of your sales are done online or in-store. A common misconception about partnering with retail finance specialists is that they only work with online retailers. In fact, many providers offer tailored solutions for offline sales too. Nevertheless, there will be implications from a strategic perspective, depending on the core marketing and sales channels through which your business operates, and this in turn can impact the viability and benefits of offering retail finance to customers.
From a legal perspective, whether you are FCA authorised as a financial services provider or not is also something to bear in mind. If you are not FCA regulated, you are still entitled to offer retail finance. However, this would be on a strictly limited basis, in that agreed repayment terms cannot exceed 12 months, and you will not be entitled to charge fees or interest. That said, if you are not FCA approved, and wish to become so in order to expand the credit facilities you avail to customers, then retail finance partners should be able to assist with your application.
Finally, if you do decide that retail finance represents a positive step forward, you’ll need to take into account your own resource to determine the best way to go about it. Would you want to go it alone? Or would you want to partner with a specialist platform; simply acting as a credit intermediary, while they provide the finance? If it is the latter option which you favour, would you look to add basic plugins to your website, or seek a deeper API integration with personalised customer and payment journeys? Clarifying these points will ultimately set you on the optimal path.
How do I partner with a retail finance provider?
As you can see above, there is a lot to factor in when deciding if POS finance is the right fit for you, but, if you deem it to be the way to go, the good news is that joining forces with a specialist platform is very straightforward.
At Lending Works, for example, you simply need to contact the sales team, and a bespoke arrangement can be discussed within minutes. Application forms are simple and streamlined, and you can expect ample support from their team of experts – both during the initial setup, and on an ongoing basis during the partnership. They should also be able to advise you from a compliance perspective with respect to the retail finance being provided, and ensure that you operate within regulatory rules at all times.
Whoever you decide to partner with though, rest assured that this is an industry with an excellent reputation, which is helping retailers fight back in the face of a challenging landscape. If it seems like it ticks the right boxes for you, then you could be a mere click or phone call away from ramping up your business to a whole new level.
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
Since opening our doors back in 2014, we’ve always prided ourselves on living and breathing two key principles at Lending Works: innovation, and putting the customer first in everything we do.
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