In line with our risk management framework, today we published our Q4 2019 performance update.
What is Retail Finance?
With the retail sector enduring its fair share of challenges, companies are looking at new ways to attract customers, and drive conversion. In an overcrowded, dog-eat-dog marketplace, with behemoths such as Amazon flexing their muscle, it’s easier said than done. Furthermore, despite rising wages, record-low unemployment and falling inflation, Deloitte reported that consumer confidence dipped to an 18-month low in the final quarter of 2018. For retailers, it presents yet another difficulty to grapple with off the back of an already-tough period.
However, one avenue which is giving retailers across the UK a much-needed shot in the arm is retail finance, also referred to as point-of-sale (POS) finance. To provide a basic idea of the power of retail finance, a report published recently by IT research firm Forrester found that facilitating POS finance increases sales by an average of 17%, and order value by 15%.
So what exactly is this form of consumer credit, and how can you jump on board? We’ll cover that and more in this comprehensive guide.
What is retail finance?
In simple terms, retail finance is the provision of consumer credit at the point of purchase/checkout. Rather than leaving the customer to seek external finance, or make use of a credit card, a retailer incorporates a credit administration system into the customer journey. This can either be done in-house, or by integrating with a third-party lender which specialises in delivering POS finance.
Retail finance usually comes in the form of interest-free credit, interest-bearing loans or ‘buy now, pay later’ arrangements. There are a number of other variations too. For example, some retailers offer interest-free credit which includes initial payment holiday periods (also known as ‘deferred interest-free credit’). There are also other alternatives which are specifically geared towards smaller/larger amounts of credit, and/or with shorter/longer payment terms for the credit agreement.
As a retailer, your initial thought may well be that offering such credit facilities will eat into your margins. However, as a wide range of research demonstrates, the gains in terms of conversion, upsell and customer loyalty simply dwarf this upfront cost, and it is thus no surprise that, in 2017, POS finance accounted for over 1.5 per cent of all retail sales in the UK – equating to year-on-year growth of 9 per cent (source: Apex Insight).
Which sectors are suitable for retail finance?
Retail finance is not the preserve of any particular niche, and is suited to most sectors. In fact, even in cases where the bulk of a retailer’s customers do not make purchases online, there is good reason to believe that POS finance can drive significant revenue uplift.
Here are some of the key sectors most commonly associated with retail finance:
Sports and Leisure
Car Extras and Repairs
Electrics and Appliances
Training and Education
Arts and Music
RETAILER AND CUSTOMER FAQs
How does point-of-sale finance impact my sales?
We’ve quoted the Forrester statistic above as a guideline, although some retail finance providers put this figure of average sales uplift much higher (up to 65 per cent in some cases). There are a number of other variables which could affect uplift, such as APRs, required deposit, the application process and how optimised your payment systems are. The cost of the goods will also have an impact. From a conversion perspective, retail finance tends to exhibit the biggest gains when it comes to big ticket items. As an example, something with monthly instalments of £300 over the course of a year looks eminently more affordable to a customer than a once-off price of £3,600.
These are all important considerations, but, if you believe retail finance is a good fit for your business model, then there’s every chance that offering this service will not only convert warm customers, but also help to upsell them. To emphasise the point, a previous Forrester study found that POS financing increased order value by an average of 75 per cent.
Do I need FCA authorisation to provide point-of-sale finance?
Contrary to what some may believe, you do not require FCA authorisation (or a consumer credit licence) to offer retail finance to your customers. However, as a result of legislation implemented in 2015, there are some restrictions in this regard. For starters, you cannot offer loan terms for a period longer than 12 months, and the maximum number of instalments permitted is also 12. In the absence of FCA authorisation, you cannot charge interest or fees for retail finance either, and the amount being charged for the item(s) must be fixed. It should also be noted that those who operate primarily within financial services are ineligible to offer consumer credit without FCA permissions.
It is understandable why firms opt not to acquire FCA authorisation given the opaque, expensive and time-consuming application process. Furthermore, it can take up to a year to be approved – and that doesn’t even factor in the prospect of delays if further documentation is requested. And, even once you become authorised, you will be required to pay a regular fee.
Nevertheless, for many companies, it may be worth their while to gain FCA authorisation so as to offer a wider range of credit options, and third-party providers such as Lending Works can assist you with your application.
How easily can I set up point-of-sale finance on my ecommerce platform?
By partnering with a specialist provider, integration with ecommerce platforms is usually seamless. It will depend whether you are looking for a full API integration, or something simpler such as plugins for your platform, and there may be some tech resource required on your side if the integration is a particularly in-depth one. However, most providers have the versatility, flexibility and technology to customise the process to suit your needs, and simple integrations shouldn’t require much more than a day or two. If you’re looking for something more complex, you should probably allow for a couple of weeks to get everything set up and robustly tested.
Can I use point-of- sale finance for short loan periods?
Yes, as mentioned above, whether you are authorised by the FCA or not, you as a merchant will have the option to offer retail finance for a period of 12 months or less (with a maximum of 12 instalments if you are not authorised). If you are partnering with a third-party platform, the minimum loan term will be subject to their terms and conditions.
How long does the application process take?
Providing a simple, expedient application process for your customers is paramount to maximising the power of retail finance, and boosting conversion. From your side, you’ll want to ensure that any application forms are as streamlined and optimised as possible.
The second stage of this is the approval process. If you are partnering with a platform such as Lending Works, you’ll benefit from market-leading credit models and technology, including an extensive range of affordability and fraud data accessed from the UK’s leading credit reference agencies - in real-time, too. These sophisticated credit models then determine whether to auto-accept, refer or decline the applicant based on this data.
In most cases, customers will be auto-accepted, which in turn results in the instant processing of the loan. For those cases which are referred to Lending Works’ team of underwriters, there will be a manual assessment, and further documents to confirm identification and/or establish affordability may need to be submitted. However, turnaround times for a decision in such cases shouldn’t be any longer than one working day.
Why choose finance over credit cards?
Agonising over whether to fund the cost of a purchase with a credit card or a loan is nothing new. Indeed, there are certain credit cards which have their merits, particularly when it comes to smaller purchases. For example, there are credit cards with interest-free periods on purchases of over two years. What’s more, some cards even give you the opportunity to earn rewards. If you are able to pay off the cost of the purchase within the 0 per cent timeframe, then a credit card may be the best option for you.
However, it’s something you should give careful consideration to. Card providers are not in the business of charity, and the reason they tempt customers with such deals is that many do not clear the balance during the interest-free period, and instead end up getting stung by hefty APRs thereafter. Worse still, many get into a cycle of making minimum repayments each month, which not only extends the period of being in debt, but dramatically increases the total cost of credit too.
In this respect, options such as retail finance provide a more transparent alternative. Both the APR and the total cost of credit are fixed, and the repayment period and instalment amounts are therefore fixed too. Additionally, the APRs offered through retail finance are very competitive, and, in many cases, 0 per cent. Add to that a quick and painless application process, and it’s easy to see why many people are choosing this option over a credit card.
Is my payment information safe?
Given the number of high-profile data breaches in recent years, this is an important question to ask of any retail finance provider. Different platforms will use different systems, and it’s worth doing due diligence on the reputations of any payment security partners, and establishing what protections are in place during the payment process.
At Lending Works, data protection has always been a core focus, and our leading team of IT experts have developed robust systems, and continue to integrate state-of-the-art technologies to ensure that payment processes for the point-of-sale finance we provide is completely secure. At a global level, we incorporate elements such as HTTPS secure connections, encryption of sensitive data, and penetration testing. At a user level, our team members adhere to strict data protection policies, which include minimising the storage of data, anonymising sensitive customer information and encrypting all local computers and file stores.
What happens if I am declined?
Platforms should provide their customers with detailed reasoning as to why the loan has not been approved, and it is likely that there will be a means through which a customer can request their application be reviewed again if they believe they have been unfairly declined. Customers may need to substantiate this by providing further information. Such requirements should be communicated by the credit underwriter.
Can I make early repayments?
Most retail finance providers facilitate early repayments. The key variable is whether you will be charged for making them – this will be subject to the terms and conditions of the platform.
Upon request of an early repayment, you will be provided a settlement figure by the lender, which will include the capital balance outstanding, and, if applicable, fees and arrears. It may also include the amount of interest you would have incurred had you not settled early, subject to a maximum of 58 days’ worth of interest (based on the balance at the point you receive the settlement figure) as per the Consumer Credit (Early Settlement) Regulations 2004.
What happens if I miss a payment?
If you are unable to make a repayment, it is always advisable to contact the provider as soon as possible. As a responsible lender, they will have trained experts who will be best placed to assist you – although it is usually better to contact them pre-emptively, rather than waiting until the payment on the credit agreement is missed.
Failure to establish communication could result in late payment charges, and/or your case being handed over to specialist debt collection agencies.
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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