How alternatives to traditional financing options positively impact corporate retailers

During the economic hardships of COVID-19, retail consumers became more interested in accessing credit to make purchases, and retailers became more interested in providing it.

But what happens to consumers without a credit score to qualify for traditional financing options? Often they are left out. But rather than leaving those customers behind, enterprise retailers can accommodate them with Buy It Now (BNPL) and Hire Purchase (LTO) solutions. With such solutions in place, more customers can access the products they need and retailers can increase their transactions. It’s a win-win for everyone.

To learn more about alternatives to traditional funding like BNPL and LTO and how it can be beneficial, PaymentsJournal spoke with Tony Cerino, Vice President of Sales at Katapult and Brian riley, Director of Credit Advisory Services at Mercator Advisory Group.

Payments Journal

How alternatives to traditional financing options positively impact corporate retailers

Payments Journal How alternatives to traditional financing options positively impact corporate retailers

What is an alternative to traditional financing?

An alternative to traditional financing is to offer buy-lease options to consumers who are considered riskier by traditional finance companies due to poor or imperfect credit scores. Non-paying borrowers may not be eligible for credit products or prime rate loans.

The waterfalls allow traders to use a network of donors and financing companies to offer different options for their customers, rather than a single consumer credit product. This allows them to offer solutions to clients considered to be subprime.

Imagine that a merchant receives 1,000 credit requests with an average ticket price of $ 2,000 (as shown in the table above). Applications begin with a primary lender, who typically follows bank grade lending standards. In this example, the primary lender approves 550 (55%) of the requests.

“We still have 450 customers who haven’t been served, and the potential volume is $ 900,000,” Riley said. The remaining 450 requests are then passed on to a second company. “The second business… won’t be at the discount rate, it will be down a notch. So there will be some who survive this approval and subscription process, ”said Riley. In this scenario, the second entity approves 165 other customers, or 30% of the remaining 450 requests.

This leaves 285 applications with a potential of $ 570,000 in transaction volume. “By adding the third step in the cascading process, where it won’t be a traditional credit solution … but it will be a hire-purchase option, being able to generate 75% of those rejections still gives us 124 approvals,” Says Riley.

Adding it all up, setting up the secondary lender and the third capital lease option results in 289 more transactions than if the retailer had used the primary lender alone. This translates into an additional volume of $ 577,000.

Rent-to-own versus buy it now Pay later

The multi-lender waterfall approach is ideal for clients looking for a buy-now, pay-later solution. A hire purchase agreement, as seen in the third step of the cascade option described above, is a little different.

“Leasing offers customers a way to obtain durable goods without the need for [a] credit score. They enter into a hire purchase agreement with a leasing company like Katapult, which then buys the item and rents it out to the consumer, ”Cerino said.

Contrary to BNPL model, hire-purchase customers have several options for their hire-purchase agreement. “They can make payments for the term of the lease (usually 12-18 months) and own the item, they can return the item to the capital lease company at any time and not make any additional payments that are not not already incurred, or they can exercise an early purchase option at any time, including the option to purchase the leased item for the first 90 days for the cash price, and usually against a fee and upfront payment that they did, ”he explained.

Retailers have historically been reluctant to offer hire-purchase payment options

Leasing creates a new opportunity for retailers to offer alternative options to consumers who do not qualify for traditional financing. Despite the benefits that this model can bring to both parties, hire-purchase solutions have always been plagued with negative connotations and seen as predatory. “The good thing is that’s not the case anymore,” Cerino said. “Leasing companies are changing the way [merchants] treat consumers, and in particular unprivileged consumers. “

Consumers that fall under the subprime category come from a range of generations and backgrounds and have various reasons why they need an alternative to financing options that are not based on a FICO score. “Ultimately, the non-prime segment is a group of customers who have needs like any other buyer, and it’s the responsibility of a capital leasing company like Katapult not just to deal with them. respect and grace. , but also to help them on their way to home ownership, ”he added.

How retailers profit from hire-purchase

In conclusion, retailers who do not offer BNPL or hire-purchase options do not provide their customers with the full range of options available and limit their volume of transactions. Katapult’s study found that corporate retailers offering lease-purchase options for durable goods like appliances and electronics see a 112% increase in transactions and an 11% increase in conversion rate. .

By multiplying the value of the drawdowns of the blue-chip financing option currently offered by 45% – Katapult’s overall percentage based on its annual metrics – retailers can calculate themselves based on what they leave on the table. For example, a corporate retailer that sees $ 375 million in premium drops, multiplied by 0.45 (45%), is missing nearly $ 169 million in revenue that could be captured with a hire-purchase option.

For retailers who want to integrate a hire purchase solution into their offerings, contacting an experienced partner is the first step. Katapult works directly with e-commerce and brick-and-mortar merchants to integrate point-of-sale hire-purchase solutions.

“It’s a full integration, very seamless to both the salesperson working in the store and the consumer as well… We work closely with our merchants to ensure that all consumer materials are ready for use when they are needed. ‘they are started with us so that the customer can be fully aware of the options that [are] available to them, ”Cerino concluded.

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