Point of Sale Financing

Imagine a shopping mall scenario where a customer named Bart is on the hunt for a new mattress. As Bart looks at the various options available to him, he has shortlisted his selections down to the final four. The only thing left to do is select the best one and pay. Bart finally selects the one mattress that he can already envision getting a great night’s sleep in. But as he flips over the price tag, his heart sinks. The price is out of his budget range, and he now has to select one that is more affordable.

While this may be a little theatrical, it is a situation faced by hundreds of shoppers every day. However, that doesn’t have to be the case in today’s shopping environment. The advent of technology has given rise to several consumer finance companies offering innovative solutions to finance purchases made by everyday consumers at retail stores. In Bart’s case, one applicable solution would be point of sale financing – a relatively new innovation that has only been proliferated on a mass scale over the past year or so.

How Point of Sale Financing Works

The concept of a Point of Sale is straightforward in the sense that it represents the terminal stage of a consumer’s shopping experience. This can be the checkout counter of a retailer’s store or the payment page of an e-commerce provider’s website. Ultimately, the Point of Sale is the stage where monetary value is exchanged for goods and services received.

Point of Sale financing is therefore a credit option offered at this stage right before the payment is to be made. When consumers are about to purchase large, big-ticket items, the Point of Sale financing option will appear in the online shopping cart or at the checkout counter in the physical retail store. If the option is selected, then the customer is redirected to the Point of Sale financing provider’s website where he/she has to enter a few details and the website’s algorithms will then approve (or disapprove) the credit. This entire process takes place in real time and can last anywhere from a few seconds to a couple minutes.

Retail Process

The customer journey for Point of Sale Financing varies across the different components of the omni-channel. In the brick-and-mortar store, the process is as follows:

1. Customer selects the big-ticket item he/she wants to purchase

2. At the checkout counter, he/she selects the POS financing option

3. The POS redirects to the POS financing provider’s website

4. Customer enters details

5. Customer is approved

Online Process

Alternatively, in a digital setting (smartphone, tablet or PC), the e-commerce merchant can integrate the financing solution directly into the existing website infrastructure. This can be as simple as displaying the credit option as in the brick-and-mortar setting or with detailed specifics on APRs and monthly payments. A sample process of this is as follows:

1. Customer selects the big-ticket item he/she wants to purchase and adds it to shopping cart

2. After completing all shopping, he/she goes to the payment page to pay. Besides the big-ticket item/s, there will be a button with the option to select POS financing, which the customer now presses

3. The device is directed to the POS financing provider’s website

4. Customer enters details

5. Customer is approved and potentially receives various repayment options depending on the provider

Business Applications

The primary users of the Point of Sale financing solution from a merchant perspective are businesses with a high average transaction value. Therefore, businesses that offer big-ticket items or goods and services that typically require customers to purchase on credit are likely to benefit the most from this solution.

Some examples can include:

Furniture shops

High-value electronics retailers

Auto repair shops

Point of Sale Financing for Furniture Shop

Point of Sale Financing for Electronics Shop

Points to Consider as a Business

Before initiating the Point of Sale Financing solutions within the business, it is important to consider several factors and evaluate strategic alignment. To this end, these factors can include, but are not limited to:

Costs

After integrating the system, there are employee training costs in addition to the set-up and maintenance costs of establishing and running the infrastructure.

Ease of Application

Providers that have long, convoluted application processes are not likely to add value to the business as customers are likely to abandon the process mid-way when they see the complexities in the application.

Technology Integration

Tech-savvy customers today want to have an easy way to track their loans. Therefore, providers that offer a digital tool or app to do this are more attractive partners to the business.

Recourse

In most cases, the provider will assume the credit risk of a POS loan. However, it is worth checking the agreements to ensure that there is no recourse to the business in any scenario.

Loan Terms

Depending on the value of the order, higher loan terms may be desirable for the customer. To ensure that customers are motivated to use the POS solution, it is important to select a provider that offers a loan term that aligns with the order value.

Promotions and/or fees

Similar to credit cards, some POS providers offer rewards points. However, there may also be potential hidden fees that may exasperate a customer and ultimately, damage the customer relationship.

Funding Gap

Gaining visibility on the lead time between customer approval and receipt of cash from the provider is important from a working capital and cash conversion standpoint.

Point of Sale Financing – Benefits

For both the customer and the business, Point of Sale financing offers several advantages that can be exploited for mutual gain.

From a customer’s perspective, these include:

Easier Credit Application: Companies offering Point of Sale financing generally conduct soft pulls to evaluate creditworthiness instead of a hard pull that would verify data such as credit scores and history. This makes it significantly simpler to get approval for credit.

Building Credit Score: Once the credit is obtained, as long as the customer pays the principal and interest amounts in a timely manner, his/her credit score is likely to rise as this type of loan does show up on credit reports.

Conducting Big Purchases: If there are large, non-recurring purchases that need to be made, this is a feasible option. The POS financing solution can come in handy if someone needs to buy something quickly but doesn’t have the capabilities to purchase it outright.

From a business’s standpoint, the merits can be multifaceted as well:

Higher Revenues: Because customers are now able to afford the big-ticket items that they previously could not, conversion rates are improved and there are higher order values. This translates to greater revenues for the business.

Risk Transfer: In most cases, the credit risk is transferred to the financing solution provider, meaning that businesses can gain the instant advantages of higher revenues without the incremental risk of repayment.

Greater Customer Volume: Because of the ease of use and flexibility in repayment, businesses that offer POS financing solutions generally experience inclines in customer volumes as well.

POS Financing – Drawbacks

At the same time, there are drawbacks for both parties as well (customer and business) in pursuing the POS financing solution.

For the customer, these are:

Higher rates: Typically, Point of Sale financing solutions come with higher interest rates that can add up to the total costs of the purchase over time.

Returns: If the product needs to be returned for non-product related issues, part of the loan may still have to be paid off depending on the refund amount received.

For a business, these drawbacks could be:

Declined Applications: It could be an awkward scenario if the customer does not get approved for the credit.

Initial Set-up and Training Costs: Depending on the type of infrastructure used by the provider, the business may have to invest in specialized equipment to set up the systems before training their employees in its use, and marketing it as a prospective solution to customers.

Point of Sale Financing vs Credit Cards

POS Financing vs Credit Cards - Difference

References:

Industry Statistics: https://gomedici.com/rise-point-of-sale-financing/#

About the Author:

Jenna West has built up a list of published work on various global recognized websites like RE/MAX Canada, Freeman Audio Visual Canada and now carries the title of Freelance Content Manager for Smarter Loans. Jenna adds creative value and fresh perspectives on all things finance, especially pertaining to millennials, and has a natural knack for turning a page full of words into a visual reading experience.