Raising product sales has been a difficulty for every retail business since the start of retailing, and it remains a challenge today. Coupled with the growing acceptance of “Buy Now Pay Later” schemes, more and more businesses are beginning to look into alternative forms of retail financing to increase the accessibility of their products. Retail financing is effective because it increases product sales without requiring price adjustments. But what is retail finance exactly? How does retail financing operate? This article will examine what retail finance is, how it functions, its advantages and disadvantages, the advantages it may offer to businesses, and more.
What is Retail Finance?
The term “retail finance” encompasses a wide range of practices that all boil down to the same thing: providing consumers with access to credit before the product is even delivered. Therefore, instead of needing to pay the full price before obtaining their things, customers can take the item home before it is paid for (either in part or in full). It’s sort of like offering an alternative to credit cards. Retail financing is frequently referred to as “point-of-sale financing” or “PoS finance.”
There are various sorts of retail financing, and the type employed depends on the industry and product. “Buy now, pay later” systems are particularly popular in the fashion industry and for transactions of lower value. In contrast, a couch or a car is more likely to be offered with an interest-free loan that requires monthly payments.
Types of Retail Finance
Retail finance includes a wide range of regulated and unregulated credit products. There are over 150 companies worldwide, each uniquely delivering retail finance.
Despite the diversity of retail finance, providers can be divided into two broad categories:
1. 0% Financing
The 0% finance method spreads the cost of a product purchase over a predetermined, extended period with no interest charged. This form of financing is a fantastic, cheap option for clients who lack the immediate finances to acquire things, while also pushing the firm to make more sales without lowering costs.
2. Bullet loans
With a bullet loan, the complete loan amount (including any applicable interest) is repaid in one lump sum at the end of the loaning period. This financing option is ideal for customers who are slightly short on cash but are confident they will have sufficient funds by the end of the loan period. Again, these loans are advantageous for retail enterprises since they drive customer spending.
3. Buy Now, Pay Later (BNPL)
As previously stated, “Buy Now, Pay Later” finance loans are gaining popularity in the retail industry. This option, as suggested by its name, allows clients to take things out on the same day and pay for them at a more convenient time. This “pay later” time is established before the customer’s purchase. As is the case with the majority of these financial loans, the “Buy Now, Pay Later” option enables customers to acquire things when they are temporarily cash-strapped, hence increasing the company’s product sales.
4. Financing with applied interest
One of the most prevalent types of loans, “Finance with Applied Interest” is supplied over a defined period with a fixed monthly interest rate.
How does the Retail Finance business model work?
Traditional lending requires consumers to pay interest on loans. Yet, point-of-sale financing is typically free if the loan amount is modest, and the repayment time is brief.
But if the consumer is not paying interest, how are the lenders making money?
The explanation is that the merchant pays the lender a percentage of the transaction value, often between 2 and 8 %. Moreover, merchants may pay a monthly subscription fee and an installation fee (paid at the time they set up the retail finance programme).
Advantages of Retail Finance
1. Creates a differentiation from competition
If you’re seeking to differentiate yourself from your competition (and who isn’t…), this is an easy approach to do so. The major companies have already brought these technologies into the mainstream, so you don’t have to worry about people not trusting them (which is normally a significant initial hurdle for ‘fintech’ services).
2. Probably increasing the conversion rate
You will likely generate greater revenue if you offer retail financing. Although there’s no assurance, you’ll see an increase of a large magnitude (particularly if you sell to an older audience or sell very low-priced products), it’s reasonable to assume that a rise is likely.
The most crucial thing is to closely monitor your conversion rate once you’ve implemented a retail finance option. It’s important to remember that nothing should be taken for granted since, as anyone who has worked in e-commerce knows, one person’s “sure win” doesn’t always mean a “sure win”!
3. Potential to boost order value
As stated previously, it is probable (but not guaranteed) that offering retail financing will boost the average order value on your website. Again, it’s important to keep an eye on this over the next few months. For example, order values might go up, but customers might buy less often. It is essential to continue examining the existing data.
Disadvantages of Retail Finance
1. Costs and/or financial risk
As we’ve already discussed, all retail finance options have some sort of cost associated with them, whether it be in the form of a per-sale commission, financial risk, or additional tech work and man hours. The key is to make sure that the advantages outweigh the disadvantages.
2. Depending on a third party to provide your customers with a positive experience
If you employ a third party in your payments process, you lose some control over the consumer experience. If your consumer has a bad experience with the retail finance provider, it’s possible that it will discourage them from ordering from your website again, or they may even request a refund or write a negative review.
3. Ethical consequences
This is a pretty subjective disadvantage, but we think it’s worth mentioning. Pay later services have grown incredibly popular recently, yet there have been legitimate concerns raised regarding their ethical standing. They encourage individuals to live beyond their means and incur debt. As a result, the Financial Conduct Authority will now regulate pay-later services more strictly.
How does Retail Finance benefit businesses?
There are a variety of benefits retail financing can provide to a business, including the ability to increase sales with no risk to the company itself. Since the loans are normally established between a separate loan provider and the customer, shops will not be required to perform the onerous work of collecting repayment from customers. Hence, retail organisations have nothing to lose by utilising retail financing techniques; these options promote sales by making things more accessible to buyers. Additional benefits include the following:
- Reduction in cart abandonment
- Increase in product purchases/sales
- Improved customer retention
- Increase in customer loyalty
In addition to all the benefits, another significant advantage of using retail financing is the ease with which it can be set up; retail finance loans can be obtained through a simple and frequently user-friendly application process, with approval given within 24 hours of a loan request being submitted.
Conclusion
Retail finance, like many other decisions, entails a degree of risk and the possibility of a favourable outcome. The good news is that modern technologies simplify the process of adding and removing this feature from your website, as well as evaluating its impact. There’s little to lose by giving it a shot, and if you do it soon, you’ll have a great opportunity to differentiate yourself from your competitors. So regardless of how you feel about “buy now, pay later” programmes, one thing is certain: they show no signs of slowing down.
FAQs
1. What is Retail Finance meaning?
Ans: The term “retail finance” encompasses a wide range of practices that all boil down to the same thing: providing consumers with access to credit before the product is even delivered. Therefore, instead of needing to pay the full price before obtaining their things, customers can take the item home before it is paid for (either in part or in full). It’s sort of like offering an alternative to credit cards. Retail financing is frequently referred to as “point-of-sale financing” or “POS finance.”
2. What are the types of Retail Finance?
Ans: Despite the diversity of retail finance, providers can be divided into a few broad categories:
- 0% Financing
- Bullet Loans
- Financing with Applied Interest
3. What are the advantages of Retail Finance?
Ans: The advantages of retail finance are:
- Creates a differentiation from competition
- Probably increasing the conversion rate
- Potential to boost order value
4. How can businesses benefit from Retail Finance?
Ans: There are a variety of benefits retail financing can provide to a business, including the ability to increase sales with no risk to the company itself. Since the loans are normally established between a separate loan provider and the customer, shops will not be required to perform the onerous work of collecting repayment from customers. Hence, retail organisations have nothing to lose by utilising retail financing techniques; these options promote sales by making things more accessible to buyers. Additional benefits include the following:
- Reduction in cart abandonment
- Increase in product purchases/sales
- Improved customer retention
- Increase in customer loyalty
