Retail finance has had a pretty spectacular couple of years. After a boost in digital spend thanks to the covid pandemic, the sector is now worth a whopping €302.9 billion and growing at a rate of 25.5% per year. But what exactly do retail financing companies offer?
In this article, we take a look at the different products retail financing companies offer to help you decide which is right for your business.
What do retail financing companies do?
Retail financing companies provide credit at the point-of-sale. This credit, referred to as ‘retail finance’, allows consumers to spread the cost of a transaction over a period of time at little to no extra cost. It’s found at the checkouts of merchants and retailers worldwide, often presented as a payment option.
The most well known iteration of retail finance is Buy Now, Pay Later (BNPL). The retail finance sector is often referred to as Buy Now, Pay Later, though strictly speaking this is incorrect. BNPL is one of many products retail financing companies offer.
The most common are:
Buy Now, Pay Later (BNPL)
BNPL allows consumers to spread the cost of small transactions (usually up to £250) over a period of up to twelve months. There is no interest or fee unless a payment is missed. The most popular BNPL products are ‘Pay in 3’ or ‘Pay in 4’, and a deposit is usually paid at the time of the transaction. The loan is typically approved following a soft credit search, though some lenders perform a full credit search.
Short-term Interest-free Credit (STIFC)
STIFC is BNPL’s older brother. It allows consumers to spread the cost of transactions up to £25,000 in value for a period of up to three years. Again, there’s no interest or fees unless a payment is missed. Hard searches are mandatory as credit is provided by regulated financial institutions.
Interest-bearing retail finance
It’s STIFC but with longer repayment terms, plus a little interest to compensate. Consumers can spread the cost of transactions up to £25,000 for as long as 10 years. The interest charged will depend on the agreement between the lender and merchant. Lower interest to the consumer will cost the merchant more per transaction, higher interest to the consumer will be cheaper for the merchant to offer. Again, hard searches are mandatory.
Pay in 30 Days
Does what it says on the tin. Consumers can delay paying for their transaction for 30 days. The full balance is due when the 30 days are up.
Most retail finance companies will offer a mix of these credit products, along with other services.
What are the differences in retail financing companies?
Aside from the products they offer, there are a few notable differences between retail financing companies.
White label
A white label retail finance company allows merchants to offer credit under their own brand. Retail finance is offered at the merchant’s checkout as normal, but from the consumer’s perspective, the merchant seems like the lender. This provides consistency in the customer journey, builds trust, loyalty, and strengthens the merchant’s brand. It also gives the merchant control over their data and analytics.
Lender/provider or lender + provider
Sometimes the lender is the retail finance platform provider. Other times the platform provider connects the lender to the merchant. Lender/providers underwrite their own loans while also providing the platform. In doing so, they take ownership of the merchant’s data, analytics and customer relationships.
Where the lender and provider are separate entities, as is the case with Divido’s platform, the merchant gets more flexibility and control. The platform provider connects the merchant to a lender, often a bank or specialist credit provider. Platform providers usually have multiple lenders on their platform, which means merchants can choose which lender(s) to work with.
The key strength in this model is control: The merchant retains control over their data, analytics, branding, customer relationships and customer journey, and the lender they want to work with.
Multi-market lending
Some providers, like Divido, offer retail finance in multiple markets. Merchants with a footing in, or ambitions to expand into the UK and other European markets can connect to multiple lenders across these regions. A single API simplifies integrations over multiple territories, making the customer journey consistent across all territories.
Single vs omni-channel
Retail finance is found in-stores and online. Some providers offer one or the other. But providers hoping to provide a consistent customer experience will offer both.
Waterfall lending
Waterfall lending aims to approve as many customers for finance as possible. Lenders are organised into tiers within the provider’s platform. The customer’s loan application is passed to a Tier One lender first. If the customer does not fit the lender’s risk appetite, the application is passed on to a second-tier lender, with less stringent credit-worthiness checks and higher interest rates. Down and down the waterfall the application goes, eventually landing with bottom-tier lenders with high risk appetites. The lower tiered the lender, the more likely they are to charge interest.
In principle, waterfall lending raises approval rates for merchants. This seems like a good thing. But customers are often denied credit for a reason. Approving every customer will cause vulnerable applicants hardship and can damage the merchant’s brand.
Want to learn more about retail finance?
Divido’s latest white paper offers never-before-seen insights into the world of checkout finance. Understand how and why customers are flocking to this form of payment, with real statistics backed up by our survey of British consumers.
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