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The Hows And Whys Of Offering Consumer Finance Options

Sometimes a consumer's eyes – and needs – are bigger than their budget. Why, how, and should consumer technology retailers offer their customers affordable financing options, and what are the potential pitfalls?

Since the dawn of retailing, shop operators have offered their customers both formal or informal financing options varying called as installment plans, layaway, buying “on time,” or revolving credit. These financing options helped consumers avoid often predatory credit card interest rates, helped retailers save on credit card fees, and helped instill shopping convenience and loyalty.

Like everything else in today’s hyper-connected online age, retailers can now deploy newer sophisticated, complicated, targeted, ubiquitous – and, sometimes, risky – omnichannel versions of these consumer finance options. Primary among these modern consumer finance options is “buy now, pay later” (BNPL) – “generally a short-term financing option that enables consumers to buy what they want now and pay for it in monthly installments over time, with as little as zero percent APR,” explains Emily Cole, chief marketing officer for Philadelphia’s World Wide Stereo. With BNPL, the lender pays off the retailer and assumes the entire risk for the loan, including its administration and collection, minimizing if not eliminating the customer service required by the retailer.

Not surprisingly, BNPL has become all the rage among both retailers and consumers.

A happy young couple relaxing together and making some online purchases.

“What has changed are a couple of things,” observes Gaurav Sethi, head of Citizens Pay Strategy, Product & Platform at Citizens Bank. “One is consumer behaviors and expectations just in terms of how they want to borrow and how they want to pay for purchases, both big and small. And, from a lender standpoint and from a consumer electronic retailer standpoint, how frictionless that experience has become. In the past, in the non-digital world, it used to be a lot more cumbersome to have to apply for credit… [O]ver the last three to five years, it has really come of age where the experience for the consumer is fast and frictionless.”

BNPL options are offered by major financial institutions, retailers, or even brands, as well as by often new or entrepreneurial third-party providers that specialize in BNPL or lease-to-own. But the heretofore solid BNPL foundations may be cracking under the weight of current economic conditions.

“[W]hat once seemed like attractive economics have been upended,” warns a recent report in The New York Times. “BNPL providers rely on loans for the money that they lend to customers for free, and with rising interest rates, those loans have become more expensive. Passing higher costs onto customers may be difficult: Those who like the idea of paying for a jacket or a dishwasher in installments may not be willing to pay extra for the privilege. The industry is now facing an existential crisis, as profits remain elusive, valuations plummet, competition increases and regulators ask tough questions about the lending practices behind BNPL.”

Choosing the Right BNPL Partner

So how do retailers safely and effectively decide to offer BNPL or other consumer finance options, and which options provide the best fit for the long term for both retailers and consumers?

Given the current economic uncertainty, “the more recognizable the payment type, the better,” Cole advises. “Plus, we wanted a partner that was going to stick around for a while. When we were first exploring online financing options, all of these players were startups and there wasn’t a lot of proof of concept, and some of them didn’t make it.”

One option for retailers uncertain about their ability to choose, integrate, and administer the right BNPL provider and program is to join a buying group that comes with an existing and turnkey consumer finance platform. “The primary benefit of this is that I have a ready-made channel for my major vendors to support buying down financing rates during promotional periods,” opines Todd Hall, president of Salt Lake City’s Duerden’s Appliance. “While I understand that instead of making money like some large merchants do by holding the paper, I’m paying a fee with each transaction, it allows our company to focus on delivering a great experience both in the store and in the home. From the merchant perspective, we pay less in fees for a 12-month finance than we do for a credit card swipe, so it’s a win for us as well.”

See also: Talking Points: How the Buy Now, Pay Later Model Can Help You Grow Your Business

Rather than choosing a single BNPL provider, some finance solutions take the form of a so-called “waterfall”: a shopper’s POS credit application is considered in sequence by a cascade of diverse lenders, beginning with prime lending options. If declined by the top lender, the application then flows down the waterfall to near-prime and, if necessary, sub-prime lenders, all the way down to lease-to-own financing, with results returned in a matter of seconds.

“‘Waterfall’ is the best of all worlds,” insists Chad Evans, VP of merchandising for AVB BrandSource, which offers a waterfall program for its member retailers. “It adds more options to the traditional third-party financing process to better fit a consumer’s needs, based on their credit worthiness, and provides longer repayment terms compared to credit cards.” BrandSource’s primary waterfall options allows for up to 72-month financing, and lease-to-own options can be extended from 90 to 365 days, which “lets a customer make payments over time and avoid interest charges if they don’t pay their credit card bill within the grace period.”

Presenting Finance Options

Offering BNPL or other financing options to customers is one thing; how to most effectively present them is another. Duerden’s Hall volunteers some practical advice:

“Always: Let the customer know what options are available. Respect the customer’s response and budget. Let them know that it’s a great tool to smooth out the shock of an unplanned duress purchase. It may help them get something they’ll be happy with for years rather than what the pocketbook can handle this month.”

“Never: Push one payment type over another,” Hall continues. “It’s unprofessional to offer a payment channel but discourage the customer from using it. Present products based on payments. Show the customer the respect of offering your best total price and let him or her decide which payment option is best.”

“Never: Stereotype customers based on their selection. We’ve financed some very large tickets for affluent customers simply because it was the best fit for them.”

Finally, Hall advises that you “pick only channels that fit your brand and your business, and stick to just one. Don’t make the customer’s decision even harder by throwing out every option.”

See also: Another View: Alternative Payment Methods Are Here To Stay