When a retailer decides to offer financing to its customers, it has a binary choice about implementation. It can either:
- Find a third party to provide the service, for which the business will pay a per-transaction fee (and possibly an additional monthly fee), or
- Find a software solution that allows the business to keep fees and sets terms in exchange on a subscription basis
Here, we’ll provide an overview of these choices, including the pros and cons of providing point-of-sale, or POS, financing options to customers in any format.
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But first, let’s acknowledge the elephants in the room: credit cards and evolving consumer preferences around sources of unsecured lending.
Credit cards are losing ground to POS financing
Through most of the past half century, credit-card companies have driven consumer financing — and become trillion-dollar businesses in the process. But these vehicles are losing market share to point-of-sale financing, especially among younger consumers.
For example, between the end of 2015 and the end of 2018, general-purpose credit cards increased by 7% in terms of compound annual growth rate, according to credit-bureau data compiled by McKinsey. In the same period, however, POS lending saw a CAGR of 24% in the same period. And the trend has continued through the pandemic, with credit cards posting a CAGR of 6% in the three years through 2021 versus a 20% jump for POS alternatives — with lots of room left to grow.
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“Banks and other issuers still dominate retail lending through credit cards, but their lead is shrinking fast,” says Elena Ionenko, co-founder and chief operating officer of TurnKey Lender, a pace-setter in the SaaS-financing industry. “With a number of providers showing consumers and businesses that installment lending is more cost-effective and empowering than credit-card financing ever could be, the tide is definitely turning.”
With credit cards losing ground, more retailers are conducting due diligence on POS financing — also called “embedded” or “buy now, pay later” financing — as a way to help consumers bridge gaps between their needs on one hand, and, on the other hand, their immediately available resources.
To paint a sharper picture for these inquirers, let’s jump into the pluses and minuses of POS financing.
On the pro side:
- More Sales
BNPL options help customers overcome reluctance, especially around large- and medium-ticket items. A direct result of this is more sales backed by incremental payments
- Deeper relationships
If embedded lending helps overcome a buyer’s reluctance to make a purchase in the first place, then it must also bring in new customers. Further, POS financing has been shown to build customer loyalty, which leads in turn to more valuable lifetime relationships
- Immediate payment
This one is conditional. If a business goes the third-party route, it will indeed take immediate payment for the product or service in question, with the third party shouldering all of the actual financing. If the organization takes a service-as-a-software approach, POS payments will come in installments — and we’ll show the advantages of this approach shortly
On the con side:
- Bad debts
Credit checks don’t catch everything, and you can wind up having to chase debtors. If you use a third party, they reserve the right to cancel your account if too many of your customers fall into this bracket, a circumstance that may be seen as beyond your control
- Cash-flow concerns
This is a two-sided coin. If you go with a third-party provider, this isn’t a worry: as we’ve noted, the merchant takes immediate payment in full. If you adopt an in-house Saas approach where you’re the actual financier, payment for financed products and services comes in according to the agreed-on schedule. On the other hand, these increments can help blunt the effects of seasonality, spreading more income out over the year.
Most third-party financing-platform providers charge businesses between 2% and 6% on every BNPL transaction, with an additional charge of between 20 cents and 30 cents per financed transaction. Above and beyond these fees, some financing providers charge another $40 to $50 a month for a stated number of transactions. They usually also charge your customers interest with little or no split with your business.
Despite these charges, some retailers embrace outsourcing the whole POS-financing piece to a competent and market-tested financier. Primarily, they like a third-party system they don’t have to think about.
SaaS means more say, more revenue, and more value
Thing is, maybe retailers should be a bit more hands-on with their lending programs, and a bit more willing to engage. That’s not to satisfy idle curiosity, but to reap three notable benefits from an SaaS-based approach to customer financing. Those are:
- Control
When you use a turnkey platform, you set all the parameters. With a third-party provider, your customers have to follow another company’s rules. The third party conducts its due diligence, sets its terms and fees, and, in most cases, keeps all the analytical insight it derives from your customers for itself or the highest bidder. With TurnKey Lender, for example, the control retailers enjoy extends to the platform itself, which is modular, and designed for retailers to use (and pay for) only the components they want or need.
- Fees
Using a turnkey SaaS platform, a retailer like you not only keeps the interest payments, you set them. As a result, you can offer no-fee grace periods, or waive fees altogether for promotions and other incentives, including favored-customer privileges.
- Analytics
Like fees, the ability to derive business insights from financing data is an offshoot of the greater control an SaaS lending platform confers. Guided by artificial intelligence, TurnKey Lender’s platform enables retailers to sort through reams of raw data to render intelligence on:
- Customer behavior
- Operations optimization
- Customer loyalty
- Marketing ROI
At TurnKey Lender, the reach of AI goes even further, according to Ionenko. “Our AI means retailers get a boost in credit-risk evaluation and fraud detection, a must-have for overall portfolio health,” she says. “It provides a crucial first step in credit-risk evaluation and fraud detection, a must-have for overall portfolio health.”
Turning undifferentiated data into workable intelligence
For this reason, adds Ionenko, “It’s vital that alternative-data inputs be uniformly formatted, easy to interpret, and readily available as an aid to credit-decision making.”
And that’s where AI comes, once again, into view at TurnKey lender. Converting data into a scoring model requires advanced tools and processes, loads of data, and years of hands-on experience. AI-derived credit scoring is vastly more accurate than traditional approaches that hinge on credit-bureau scores and application responses, and provides retail-based lenders with confidence they’re getting a fuller picture of applicants and approving loans that are apt to perform well.
While taking account of traditional scoring sources, advanced lending AI also equips retailers to include “alternative” inputs that gauge applicants on the basis of behavioral-finance insights that go far beyond traditional scoring.
“We’re providing a 360-degree view of retail-financing applicants at any point of sale, and in mere seconds,” says Ionenko. “These tools help lenders assess and respond to borrowers in ways that encourage timely repayment, and provide them with the operational flexibility they need to compete effectively.”
