Installment loans are nothing new—consumers have been using them for decades to finance big-ticket purchases like appliances, furniture, and electronics. With the rise of new financing providers, however, the process is now more seamless and accessible than ever and gaining traction.
As a merchant, should you jump on the POS financing bandwagon?
In this blog post, we’ll delve into the benefits and costs of POS financing for small businesses, examining its potential impact on sales, customer acquisition, and overall business growth.
What Is POS financing?
Point of sale financing is a process by which merchants offer customers a way to pay for a product—in-store and online—using a third-party lender. It allows consumers to break purchases into installments, with set interest rates and repayment schedules, while the merchant receives full payment as they would with a credit card. This payment solution was already trending before the pandemic and, like many other emerging retail trends, has only accelerated since COVID-19.
A growing industry
The POS lending sector is growing exponentially. Between 2015 and 2019, outstanding balances originating from POS lending solutions more than doubled.
The space has gained visibility and acceptance as a payment option while the application process continues to improve. Furthermore, the industry is starting to grab market share from credit card companies, snatching 3% during the same period.
Key players in POS financing
Some of the industry’s heavyweights include Affirm (which has partnered with the likes of Peloton), Afterpay, Sezzle, and Klarna. They all work on the same premise, namely buy now, pay later (BNPL).
How POS financing works
For an eCommerce purchase with financing, the typical process looks like this:
- Customers add an item to their cart.
- They choose the POS lender or buy now, pay later option during checkout.
- Customers log in (or create an account) and wait to be approved.
- Payment is broken up into chunks (usually four) and is payable over a given period.
POS financing vs BNPL
While POS financing and the ‘buy now, pay later’ (BNPL) model share similarities, it’s essential for small businesses to understand the nuances that set them apart.
- Payment structure:
- POS financing: In this model, the customer agrees to a fixed repayment schedule with predetermined interest rates, usually spanning several months (POS lending can even last years). The merchant receives the full payment upfront, similar to a credit card transaction.
- Buy now, pay later: Typically allows customers to delay payment for a specific period, with some offering interest free payments (but customers must pay on time). The payment is usually divided into multiple installments (often anything between 4 and 12 months), offering flexibility without a rigid repayment schedule.
- Integration and usage:
- POS financing: Integrated into the point of sale, this option is presented during the checkout process. Customers can choose to finance their purchase at the time of transaction. POS financing is often used for higher ticket items.
- Buy now, pay later: This model is versatile and can be integrated at various stages of the customer journey, not limited to the point of sale. It allows customers to spread payments across multiple transactions.
- Approval process:
- POS financing: Typically involves a brief approval process during checkout, where customers may need to create an account and await confirmation.
- Buy now, pay later: The approval process is usually instantaneous, with customers gaining immediate access to the financing option without extensive credit checks.
Should your business offer POS financing?
POS financing solutions have their pros and cons, and they aren’t for every merchant.
The main argument for using POS financing in your small business, is the access to new customers and potential sales increase. Offering financing options can help you grow your business by opening the doors to customers that would otherwise not be able to purchase your products.
Benefits include the following:
- Higher sales volumes
- Higher conversion rates
- Lower fees
- Higher-order values
- Access to new customers
On the other hand, the main disadvantage is the risk of a customer being declined at the checkout. Likewise, there are setup and training costs associated with any POS financing solution.
- Customer declines and risk of defaults
- Interest rates and fees
- Dependency on third-party companies
- Customer education
Considerations before choosing a financing solution
Cost: Before implementing a solution, do some research on the costs. For example, you’ll have to train your employees and integrate the platform into your eCommerce channels. Also, there are ongoing costs associated with partnering with a POS lender.
User-friendliness: Whichever offer you choose, the entire lending process needs to be seamless. A cumbersome loan application and checkout process will frustrate customers and be unlikely to add value to your business.
Loan terms: Team up with a provider that provides the most favorable terms and pairs with your products or services. Interest rates and late payment fees vary between lenders, with some offering interest rates as high as 30% and fees for late payments.
If you have partnered with a POS lender or are thinking about it, consider integrating the offering throughout your site. According to a McKinsey report, merchants that integrate a financing option throughout their website and not just at checkout saw a 3.2% increase in conversion rates. The same report notes that 75% of consumers who decide to use POS financing for big-ticket products make the decision to do so well before checkout.
Partnering with a POS lender is worth considering, especially as consumer awareness of POS financing continues to increase. Although there are some drawbacks, POS financing is here to stay and is poised to keep growing. If you’ve got any questions about integrating POS financing into your business, get in touch with Sekure Payment Experts today, and our Payment Experts will be happy to guide you through the process.