Between a global pandemic, Brexit, and increased pressure from ecommerce giants like Amazon, it’s fair to say the last few years haven’t been plain sailing for retail businesses. Standing out from the crowd feels even more important — but that can feel pretty hard when the crowd is so big.
You may have noticed larger brands (particularly fashion brands) introducing ‘buy now pay later’ (BNPL) schemes, and with great success; BNPL schemes are growing at a rate of 39% per year, and claim to boost sales by ‘up to 30%’.
But while retail finance options are increasingly common among larger brands, it’s still fairly uncommon to see this offered by smaller retailers. In this post, we’ll walk you through exactly what retail finance is, its pros and cons, and how you can adopt it for your site.
What is retail finance?
Retail finance takes on a few different forms, but is essentially a way of offering upfront credit to customers. So instead of a customer having to pay the full amount before receiving their items, they’re able to take the item home before it’s paid for (either in part, or in full). It’s kind of like offering an alternative to credit cards. Retail finance is sometimes also referred to as ‘point of sale finance’, or ‘POS finance’.
There are different forms of retail finance, and the type used depends on the sector and product. ‘By now pay later’ technologies like Klarna are extremely popular within the fashion industry, and for lower value purchases. Whereas something like a sofa or a car is more likely to be offered with an interest-free loan requiring monthly payments.
How to offer retail finance
1. Use your own technology
Offering your own retail financing option is possible (we do it here at Creoate), but it’s definitely not a simple solution. You need to have the technology and people-power to prevent it being used fraudulently, and you assume all the legal and financial risks of offering credit — if your customers don’t pay up, you’ll lose money, or need to start legal proceedings to recover it.
2. Explore options with your bank
It’s worth checking whether your bank can support you in offering retail finance solutions to your customers. This is something Barclays offers, and other banks are likely to follow suit in supporting their retail customers with this increasingly-popular technology.
3. Try an out-of-the-box solution
Klarna is the most popular out-of-the-box ‘by now pay later’ system, and integrates with most key ecommerce platforms quickly and easily. It offers customers the chance to pay in four interest-free installments, and even flags this directly on your product pages (although this is optional) for maximum impact on conversions.
The downside is the cost. Klarna absorbs all the financial risk of retail finance, and pays you the full amount as soon as a purchase is made — but you pay a percentage of each transaction (up to $0.30 and 5.99%). However keep in mind that this includes credit card processing fees, which would normally cost 1.5-2.9% per transaction, anyway.
Pros and cons of retail finance for small businesses
Now we’ve shown you what retail finance is, and how to go about implementing it, let’s look at the key pros and cons:
Advantages of retail finance for small businesses
1. Creates a point of difference from competitors
As we mentioned up top, not many small businesses are using retail finance options such as Klarna. That’s despite 9.5 million Brits claiming they actively avoided buying from retailers that didn’t offer buy now pay later solutions in 2020.
If you’re struggling to stand out from your competitors (and who isn’t…), this is a quick way to offer a point of difference. The big brands have already done the hard part by bringing these technologies into the mainstream, so you don’t have to worry about customers not trusting them (something that’s typically a big initial barrier for ‘fintech’ services).
2. Likely to increase conversion rate
It is likely that you will make more sales through offering a retail finance option. Klarna boasts some really amazing success stories here, with conversion rate increases of up to 44%. There’s no guarantee you’ll see an increase this substantial (especially if you sell to an older demographic, or sell relatively low-value products), but it’s fair to say that some increase is likely.
The most important thing is to monitor your conversion rate very carefully once you’ve implemented a retail finance option. It’s essential to not take anything for granted — as anyone who has worked in ecommerce knows, one person’s ‘sure win’ doesn’t guarantee a ‘sure win’!
3. Likely to increase order value
As above, it is likely (but not guaranteed) that offering retail finance will increase the average order value placed on your site. Again, it’s important to monitor this over a period of several months — it may be the case, for example, that order values go up, but that customers end up making purchases less frequently. It’s important to continue to interrogate the data you have available.
Disadvantages of retail finance for small businesses
1. Cost and/or financial risk
As we’ve covered above, any retail finance option involves some kind of cost, either in the form of a per-sale commission, financial risk, and/or tech work and extra man hours. The trick is to make sure that the benefits clearly outweigh this.
2. Relying on another party to give your customers a great experience
If you involve a third party in your payments process, part of the customer experience is no longer within your control. It’s possible that, if your customer has a negative experience with the retail finance provider, it could put them off ordering through your website again, or they could even end up asking for a refund, or leaving a negative review.
3. Ethical implications
This is a fairly subjective disadvantage, but one which feels worth mentioning. By now pay later services like Klarna have become hugely popular in recent years, but there have been valid questions raised about how ethical they are. Specifically, that they encourage people to live beyond their means, and to get into debt.
As a result, by now pay later services are now to be better regulated by the Financial Conduct Authority. But there are still high profile people — like influencer Oghosa Ovienrioba — who won’t promote Klarna due to the risk of it getting people into cycles of debt, especially younger people.
Final thoughts
Retail finance, as with many decisions, involves some degree of risk alongside the chance of positive impact. The good thing is that new technologies make it easy to add and remove this functionality from your site, and to assess its impact. There’s little to be lost from giving it a go — and if you do so now, you have the chance to really set yourself apart from your competitors. Because whatever you think of ‘buy now pay later’ schemes, one thing’s for sure: they’re not showing any signs of slowing down.
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