What is retail finance? (And where does BNPL fit in?)

By

Nathan Woodley
Content Marketing Executive

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Retail finance has exploded in popularity in recent years. But what is retail finance? And how can it benefit your business and customers?

What is retail finance?

Retail finance is a form of finance offered by lenders to retailers. It enables merchants to offer credit products at their checkout.


With retail finance, credit is usually offered at the point of sale. Where the customer has the option to pay with cash or card, they may also be offered the chance to split the cost over instalments, sometimes with a deferred payment period.


Retail finance is therefore sometimes referred to as point-of-sale (POS) finance, checkout finance, deferred payments, post-pay, and instalments as a service. These categories cover a broad range of credit products, but are all starting to come under the umbrella term Buy Now, Pay Later (BNPL).


BNPL is often used as a catch-all phrase to cover a variety of retail finance products. However, in reality, BNPL is just one type of retail finance.


Put it like this: all BNPL is retail finance, but not all retail finance is BNPL.

What’s the difference between retail finance and BNPL?

In short, retail finance is the umbrella term for a variety of credit options that merchants may offer to customers to help finance their purchases.


Buy Now, Pay Later is one example of a retail finance credit product. It is a type of a deferred payment plan, usually offered for items below £500 in value, with payments divided over three to four months.


Another example of a deferred payment plan would be Short-term Interest-free Credit (STIFC), which is usually offered for purchases above £500.

What are the different types of retail finance?

Retail finance encompasses a range of regulated and unregulated credit products. There are around 150 providers globally, each offering retail finance in a slightly different way.


However, despite the many flavours of retail finance, providers can be split into two main categories:

Traditional retail finance

Traditional retail finance providers provide both the lending platform and the loan. These types of providers slap their own branding onto the merchant’s checkout, then lend to consumers from their own balance sheets. They often finance these loans by borrowing from central banks.

Whitelabel retail finance

Whitelabel retail finance providers give merchants control over their customer journey by enabling finance under the merchant’s branding. A whitelabel provider connects consumers to one or multiple third-party lenders, usually Tier One banks. Divido’s platform is one example of a whitelabel platform.


Retail finance products differ in their offering but generally share the following characteristics:

 

  • Retail finance appears as a payment method at the merchant’s checkout via an API (online) or using a merchant portal (in-store)
  • The consumer pays an initial deposit
  • The rest of the cost is split into monthly instalments to be paid over several weeks, months or years
  • The consumer receives their goods right away
  • There are typically no fees to pay, though some providers do charge interest and late fees


Now let’s explore the main categories of retail finance.

Buy Now, Pay Later (BNPL)

The best-known form of retail finance is Buy Now, Pay Later (BNPL).


BNPL is a form of interest-free credit that lets consumers purchase an item immediately (sometimes after an initial deposit), then pay it off over a short period.


The Equated Monthly Instalments (EMIs) are repaid on a weekly or monthly basis. There are usually no additional fees to pay, unless a payment is missed.


Consumers can make transactions up to £250 after a soft credit check, with an upper credit limit of around £2,000–4,000, depending on the provider.


Buy Now, Pay Later is most commonly found at online checkouts but is increasingly found at physical checkouts too.

 

Physical and virtual BNPL cards are also becoming commonplace – these allow customers to spend at multiple locations up to an agreed credit limit, while only paying back a single loan.

Short-term Interest-free Credit (STIFC)

Short-term Interest-free Credit (STIFC) allows consumers to spread the cost of a purchase over a period up to 36 months after an initial deposit.


Many providers offer a deferred payment period after the initial purchase, which can extend up to six months. Repayments are then taken on a weekly or monthly basis.


STIFC usually requires a hard credit check, which is why the finance tends to be provided by regulated financial institutions.


STIFC is mostly used to finance larger-value purchases, ranging from £250 up to £25,000. Home furnishings, sports and leisure, DIY and travel companies are some of the many types of businesses that offer STIFC.


STIFC is commonly found in stores at the checkout, though it is increasingly appearing at online checkouts too. The lines between BNPL and STIFC are therefore becoming somewhat blurred.

 

Interest-bearing retail finance

Interest-bearing retail finance functions in the same way as interest-free retail finance products.

It is found at the checkout, allows consumers to spread the cost of a purchase over a short period, and offers a deferred payment period. Often, lenders will also offer interest-free credit products.


Interest-bearing retail finance differs, however, in that lenders charge interest on the loan. This is often due to the lender’s appetite for risk. 


A high price, longer repayment period, or lower credit score are some of the reasons a lender may charge interest. This helps them to compensate for the ‘riskiness’ of the loan.


Interest-bearing retail finance is likely to grow in volume in the coming months as lending at 0% becomes less viable for lenders.

How does the retail finance business model work?

Traditional lending charges consumers interest on their borrowing. But point-of-sale finance is usually free to use, so long as the loan amount is not too high and the repayment period is short.

 

But if the lenders aren’t receiving interest from the consumer, how are they making money?

The answer is that the merchant pays the lender a percentage of the value of the transaction, usually around 2–8%. Merchants may also pay an additional monthly subscription fee, and an installation fee (paid at the time they set up the retail finance programme).

What are the benefits to merchants?

Consumers who may not have been able to afford the upfront cost of an item can use retail finance to make the item more affordable. This provides a number of benefits to merchants:

 

  • Higher average order values: Consumers buy more when they use retail finance. Average order values increase 20% on average.
  • Lower rates of cart abandonment: Consumers are less likely to abandon their shopping carts, adding to a further increase in sales volume.
  • Access to a new pool of customers: Consumers who don’t want to rely on high-interest credit or revolving credit models (like credit cards) are drawn to retail finance for its low cost and to help them manage their money.
  • Increase in customer loyalty: Many consumers look specifically for merchants who offer retail finance. 9.5 million Brits said they would avoid using a retailer who didn’t offer BNPL.

What are the disadvantages to merchants?

The term “Buy Now, Pay Later (BNPL)” has become a short-hand for the entire retail finance industry. BNPL has come under fire from some parts of the media for offering quick-and-easy loans to young people and has been blamed for getting them into debt.

Because of this association, some retailers consider any form of retail finance to be a PR risk.

However, the media hasn’t been totally fair in its portrayal of retail finance. Done properly, BNPL can be a huge benefit to consumers, offering them an affordable way to manage their finances.

What are the benefits to consumers?

Retail finance is a quick, convenient and low-cost way for consumers to spread the cost of purchases. Seamless customer journeys enable a smooth shopping experience that contrasts traditional loan applications.

It also functions as a great tool for money management, and is available for those who may otherwise not have been able to access it.

What are the disadvantages to consumers?

Many retail finance products are offered by regulated financial institutions with a legacy of lending to lean on. However, the same cannot be said of all Buy Now, Pay Later services.

Essential steps in the lending journey, such as credit worthiness checks, credit reporting and proper communication are often missed out by BNPL providers. In the absence of proper regulation, lenders have been allowed to lend to consumers with doing their due diligence first.

But, this is all changing as regulators around the world are taking notice of the potential for consumer harm. BNPL in the UK is expected to fall under new regulations from 2023 onwards.

I’m a retailer: is now a good time to implement retail finance for my business?

Yes! There is very little financial risk for retailers implementing retail finance, and you could start benefiting from increased number of transactions, higher order values and improved customer loyalty right away. With the BNPL market expected to be worth $1 trillion, representing a quarter of all online transactions by 2026, this is the perfect time to take advantage of the opportunity.


If you’re interested in starting your own retail finance programme, we at Divido can help. Our whitelabel platform allows you to offer retail finance under your own brand, with point-of-sale loans backed by multiple Tier One lenders. Find out how your business can benefit by getting in touch with Divido today.

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