As the payments landscape continues to expand and undergo rapid technological innovation, consumer credit at the point of sale will be an exciting space to watch. While point-of-sale financing has been around for quite some time, the rise of e-commerce means these financing options are starting to look a bit different — and rightly so, as the existing solutions are ripe for disruption. In this article, we’ll explore how consumer credit has evolved over the years, as well as dive into some details of point-of-sale financing.
The evolution of consumer credit and the role of point-of-sale financing
Traditionally, there were three common types of consumer credit available for making purchases. A bank credit card is arguably the most common, followed by private-label or store-branded credit cards from individual retailers, such as the popular Target REDcard, West Elm Credit Card, or the Lowe’s Advantage Card. Some retailers also offer the option to purchase on layaway, which allows the customer to reserve an item by paying for it in smaller amounts over time.
In today’s retail landscape, however, many brick-and-mortar stores are struggling to keep up with e-commerce competitors, with online sales growing at a rate nearly seven percentage points higher than in-store sales. As evidence of this, one industry study indicates 62 percent of shoppers have made a purchase on their smartphones. This figure is likely to continue rising as trends have shown that mobile commerce is gradually overtaking desktop e-commerce spend. As more and more shopping transitions from brick-and-mortar to online, it is important for retailers to evolve their payment strategies to offer alternative financing options to their customers.
While private-label credit cards account for over 51% of all open credit card accounts at the end of 2017, the total number of open accounts remains well below its pre-recession levels. This is a clear indicator that many consumers, particularly millennials, are trying to avoid revolving debt. This demographic is notoriously averse to credit and debt, with one study finding that millennials carry two fewer credit cards and private label cards on average than their Gen X counterparts. In fact, less than a third of millennials even have a credit card.
As credit cards companies face greater market competition from alternative payment options, there is significant opportunity for retailers to improve point-of-sale financing options that extends beyond the traditional private label credit card. Offering the option of an installment loan at the point-of-sale not only widens the spectrum of customers served, but also improves the user experience and makes it easier and quicker — for both the customer and the retailer — to extend and access credit at checkout.
What is point-of-sale financing?
Point-of-sale financing is a type of consumer credit that allows the buyer to apply for a loan or line of credit that finances a specific purchase or allows the customer to purchase up to a set limit with a single retailer and pay it off over time. These products are generally categorized as either closed-end or open-end credit.
Open-end credit, or a revolving line of credit, presents limitations in attracting customers toward this payment option. Traditional credit cards are one form of open-end credit, but in the point-of-sale financing world, private label credit cards and store-branded cards are the two products to keep in mind. Unlike conventional credit cards, these cards can only be used with a single retailer. With private label credit cards, the length of the loan is undetermined, which makes the total repayment scope and price, including interest, more difficult for consumers to grasp — creating friction in the buying experience.
Closed-end credit products — also commonly referred to as installment loans — are generally used to finance a specific purchase, with payments split up into a set number of equal monthly installments. With the rise of e-commerce, this class of point-of-sale financing has seen growing popularity as retailers search for ways to offer their online consumers a wider variety of payment methods. Compared to credit cards, the fees and payment obligations for closed-end loans are more transparent and are laid out in a consumer-friendly way. Empowering the consumer with knowledge about how much they will pay for a specific item, over a defined period of time, creates a smoother checkout experience.
Take, for example, a consumer who is looking to purchase a $1,000 laptop. If she were to put $1,000 on a credit card and make the minimum monthly payment, she’d have to carry a high balance on her credit and pay interest on the outstanding balance until the entire amount was paid off. Both the timeframe and the total cost are indefinite because they depend on how long it takes the customer to pay the total amount.
With a closed-end loan, however, the terms are laid out clearly from the beginning, making both the duration and the total cost transparent. By splitting the entire payment, including the interest rate, into a given number of installments, the customer knows exactly how many payments, and of what dollar amount, she’ll make. Thus, she’ll also know precisely how much she’ll end up paying overall. Returning to the example of the laptop, if she takes out a loan at 9.99% for a 12-month term, she will pay $54.92/month, for a total cost of $1,054.92.
How does a consumer interact with point-of-sale financing?
Online, point-of-sale financing can be integrated directly into the merchant’s website checkout experience. The site might prompt the customer to apply for financing at any point in the online shopping journey — from the category or product page, to cart and checkout — giving the options of paying for the laptop all at once or applying for financing to spread the payment out over six or twelve monthly installments. Approval takes place instantaneously, and monthly payment amounts and total costs are clearly laid out, allowing the buyer to factor interest rates into her purchase decision.
Online closed-end financing is quick and transparent, which makes for a much-improved shopping experience when compared to the tedious process of applying for a store-branded or private label credit card. A better experience for the customer translates to higher loyalty, better conversions, and more sales for the merchant.
Once the loan is approved and agreed to, the customer interacts and makes payments directly with the lender. No finances are actually exchanged between the consumer and the merchant, and the lender pays the merchant within days.
What are the benefits of point-of-sale financing?
Retailers that offer point-of-sale financing in their online stores have seen up to a 33% lift in average-order-value and a 9% increase in sales, all without taking on any additional credit risk. Merchants get paid up-front for a purchase and platforms like Bread assume all credit and fraud risk, making it simple for retailers to offer point-of-sale financing to help increase sales and offer alternative payment methods to consumers. As CNP fraud continues to rise as more retail spend shifts online, offering this option helps lessen a merchant’s overall risk exposure, which can reduce the burden of unnecessary associated fraud costs.
Point-of-sale financing makes it possible to extend financing options to consumers who may not qualify for other types of loans and would not otherwise be able to buy the merchant’s products. This includes both millennials, who may struggle to build credit (particularly if they don’t have any credit cards), and under- and unbanked consumers, who together made up 27 percent of the U.S. population, or 33.5 million households, in 2015. For these consumers, point-of-sale financing is a tool that offers the potential to purchase higher-ticket items that might otherwise be out of reach.
Furthermore, point-of-sale loans are more transparent for the consumer than credit cards. Understanding the total cost and length of repayment empowers consumers to make better financial decisions, as well as build credit, all while demystifying the credit process.
There’s clearly a market for online point-of-sale financing in the U.S., and alternative e-commerce financing platforms like Bread are beginning to make waves by giving consumers flexible, transparent payment options and incremental sales to merchants.