Though relatively new as a web-enabled technology, digital point-of-sale financing had already topped $100 billion a year in the US when the coronavirus descended early in 2020. Now it’s in sharper focus among retailers striving to do two big things: boost sales that have been impaired by lockdown-inspired social distancing, and lay the groundwork for a post-Covid recovery.
We’ve created this post to help businesses decide whether providing point-of-sale or POS, financing makes sense for them in these uncertain times.
“POS financing, similar to the in-store financing US consumers knew 50 years ago, occurs when a merchant offers customers the opportunity to make specific purchases on credit,” says Dmitry Voronenko, CEO and co-founder of lending-technology maker TurnKey lender. “In this equation, either the merchant or a third-party vendor — a bank, say — functioning as creditor and administrator.”
Appealing to consumers looking for help in hard times
For consumers, Voronenko adds, tech-assisted POS financing has several advantages, such as:
- It’s fast and easy: In-store loan applications are processed quickly, at any point of sale, before a purchase occurs — ditto for online purchases.
- It’s getting popular: Thanks mainly to retail giants like Amazon and Walmart, which offer POS-financing options for online checkout, shoppers and sellers are more aware than ever before of POS-financing options, especially for bigger-ticket items.
- It’s dynamic and up-to-date: Lending-software firms like TurnKey have automated administrative functionality and they’ve improved credit origination and processing with artificial intelligence and customizable scoring models.
- It’s not a credit card: Millennial and gen-Z consumers, many of them anticipating or already struggling to meet student-loan obligations, are warier of credit-card debt than boomers.
- It’s a positive step: Rolling lockdowns enacted to slow the spread of the coronavirus have also slowed global supply chains and commerce. Fighting back, some retailers are providing new financing options against an economic backdrop of a sharp recession and record unemployment.
POS lending in the US will account for $162 billion by 2022, McKinsey & Company says in a pre-Covid analysis of the point-of-purchase marketplace. Whatever the pandemic may do to upset this prediction, the forecast marks a sharp climb from 2015, when US retail purchases under POS arrangements amounted to $49 billion, according to McKinsey.
The five critical advantages of point-of-sale financing
Retailers eyeing POS financing stand to benefit in several key business areas, including:
- Sales and order value: By giving your consumers more time to pay, POS financing effectively increases their buying power, leading to higher sales (32% higher, according to Forrester) for you. You may also expect higher average order value as POS customers opt for higher-end products and services.
- Cash flow: Whether you opt for turnkey software to run your POS program, or turn to an outsourcer, a swift, accurate, and flexible credit-decision engine means less time between closing a sale and getting paid.
- Fees: The greatest fee advantage in POS financing is reserved for businesses that use lending technology rather than an outsourced solution.
- Customer base: Having consumer financing — especially when it lets your business set its own criteria — means you can attract buyers who might either struggle to qualify for personal loans, or feel disinclined to commit to a lengthy wait period for approval.
- Customer experience: Don’t underestimate the marketing value of providing an effective POS program. People talk, and they talk a lot about their good and bad retail experiences. A smart, customizable financing program helps create customer loyalty and long-term relationships.
But how to get started? First, decide whether a third-party lender or an in-house option makes more sense.
The first option — outsourcing — is great for retailers eager to avoid:
- Having to wait for the money. For businesses that use POS-financing outsourcers, loan settlements are between the outsourcer and the customer. The retailer gets paid in whole quickly.
- The intricacies of underwriting. With an outsourcer on deck, risk assessment and “decisioning” is built in.
- Complicated financing. Outsourcers are great for “no frills” POS financing; less so for retailers who want to probe alternative credit scoring, offer specials and other incentives in POS-lending programs to reach customers who — though not risky — might not qualify for financing using traditional underwriting rules.
Weighing outsourced against software-assisted point-of-sale solutions
But more and more retailers are choosing cloud-based lending technology for POS financing over outsourced solutions. This offers several advantages, including:
- Enhanced data integrity and security. All client data is held strictly between your business and its customers so you can cater to clients who demand complete confidentiality. You also run no risk of customers getting lured away by competitors introduced to them on the loan-servicing web pages of third-party lenders.
- Less checkout dropoff. A simple checkout process that doesn’t call for submitting additional applications to third parties increases the chance of the customer deciding to back out of the transaction.
- Sensitive underwriting rules. The retailer sets its own criteria for credit decisions and controls which customers they want to approve while ensuring that your interest rates are both profitable and adequate through risk-based pricing.
- The ability to use customers’ transaction records for more accurate credit decisions may result in:
- Operational efficiency supported by artificial intelligence to enable fast and smart decisions.
- Optimized portfolio yield with technology that helps retailers identify the most profitable customers on the most favorable terms.
- No transaction fees payable to third-party lenders — which can be as high as 15%.
- Encrypted apps to ensure secure functionality at any location there’s wifi or mobile data.
For retailers facing headwinds from the coronavirus, measures to prevent its spread and a closely associated economic recession of uncertain depth and duration, “giving customers the option to pay for items over time through POS financing can reduce ticket shock, cement loyalty, and help retailers close sales, now and in the future,” says TurnKey Lender’s Voronenko. “So, beyond reducing the risk of unsecured lending, beyond making customers happier, a rational approach to POS financing can also boost enterprise value.”
Schedule a personalized demo of TurnKey Lender tailored to your business’ lending automation needs.