Teresa Byrne, Chief Commercial Officer, DivideBuy, shares her views with Payment Expert on the future of retail and the role of responsible lending.
Commenting for Payment Expert, POS finance has revolutionised online shopping in recent years. With the number of customers using POS finance having risen from 100,000 in mid-2016 to over 5.6 million today, such services are the modern reinvention of an old form of credit lending.
There are many reasons for this rapid uptake. Allowing consumers to defer payment or pay with interest-free credit instalments, today’s POS finance enables frictionless one-click shopping in-store, online, and through mobile apps.
Ultimately, consumers get the convenience of paying in ways that suit them, with affordable repayment timeframes that help them take control of their finances. At the same time, these LendTech solutions give merchants new ways to connect with customers and draw upon data-driven marketing insights that can lift their business into the stratosphere.
POS finance has become an easy and popular way to split the cost of previously unattainable purchases into smaller, more manageable chunks. At a time when a perfect storm of economic pressures from inflation, the rising cost of fuel, and supply chain constrictions is pushing up living costs for people across the board, more people than ever before are looking to spread the cost of purchases in flexible ways, and considering POS finance to help make finances more manageable.
Dispelling the debt myths around POS lending
But amid this surge in popularity, the debate rages around whether it works in the best interests of the consumer. Doom-mongering headlines tout that interest-free credit and other forms of checkout finance are causing consumer debt levels to rise, and that POS finance providers and merchants are intent on promoting reckless spending with no thought to the impact on the individual. But these attitudes are often the result of a lack of awareness and confusion, with many consumers and merchants failing to fully grasp what POS finance is and what it offers.
With so many misconceptions around the use of POS finance, and in a bid to cut through the noise, I want to help demystify POS finance and change the perception of it as a scary and irresponsible debt-causing monster, to what it is in reality – a useful and flexible budgeting tool, that can help consumers with their financial management, and be a vital aid to merchants as they seek to streamline payment journeys and bolster revenues.
It’s not just millennials who like POS credit
Many media stories have cast POS lending as the villain in the consumer credit world, luring unsuspecting consumers into racking up debt, tempting them to buy items way beyond their budgets, or make reckless impulse purchases for fast fashion or tech gadgets. One of the most pervasive misconceptions about POS finance is that it’s mainly millennials and Generation Z consumers, with unbridled appetites for instant gratification, who are behind its growth, lured into impulse buying of the latest gadgets and Instagram-friendly fashion. These negative connotations are unfair.
Yes, a growing number of consumers in youth demographics are indeed using POS finance. But the actual reasons why are more to do with younger consumers’ aversion to traditional interest-bearing lending products like credit cards.
These misconceptions also ignore the reality that interest-free credit is being used, and used responsibly, by consumers across all income groups, including those with already-strong credit records who simply want more choice in how they pay for things. The flexibility of POS finance means it’s being used to pay for everything from sofas, home improvement projects, weddings, and even vets’ bills.
Interest-free credit, offered in a transparent, ethical and regulated way, can support people throughout their entire adult lifecycle, at different stages of their lives, when making considered and informed purchases like these.
Merchants can reap rewards, but must avoid pitfalls of POS finance
POS finance can solve many pain points – as well as making purchases more affordable for shoppers, there are direct and immediate benefits for merchants too: reduced customer acquisition and admin costs, faster onboarding of customers, increased checkout conversions and much lower cart abandonment rates.
Pitfalls can appear when merchants look to partner with lenders who supply the credit lines to the customer. Some lending solutions have often implemented high-interest charges and hidden fees, working in the interest of the lender but not the customer.
The lack of distinction between regulated and unregulated lenders further adds to the confusion surrounding POS finance and can create costly complications for both merchants and their customers. When merchants are selecting credit lenders, they should ensure that the lender is regulated by entities like the Financial Conduct Authority (FCA) in the UK, which applies strict criteria to authorised lenders to ensure they’re abiding by responsible lending practices. Here at DivideBuy, we champion the need for regulation in our growing sector. Not only does this give protection to both consumers and merchants, but it also helps merchants to build trustworthiness in the minds of their customers.
Consumer credit agreements provided by lenders often come with a baffling list of terms and conditions, which can be hard for consumers to interpret. Merchants should work with their lenders to ensure that these agreements are as clear and as transparent as possible, so that consumers know exactly what they’re signing up for, how much they’ll be paying, and avoid spiralling into debt.
A rigorous credit approval process will weed out delinquencies
Interest-free credit helps merchants to reach more customers because it’s the merchants that are taking on the cost of interest on behalf of their customers. You’d think that would be a no-brainer in bringing in more customers and driving up profits, but with many businesses struggling with tight profit margins, the choice of credit lender needs to be considered very carefully.
Merchants typically pay a percentage-based fee for each consumer transaction, and there may be additional costs payable to the POS finance lender. Businesses with wafer-thin profit margins could face hits to profitability if they end up with a lender that gives credit to delinquency-prone consumers, who rack up purchase after purchase, with no effort made to make repayments.
While it’s true that most POS finance providers will apply late payment fees to consumers, this doesn’t help the merchant, which now has to contend with the loss of items, repayment shortfalls, and even thinner profit margins. And simply put, any business that relies on penalising consumers to make their revenues is just not ethical, nor sustainable. This is another way that DivideBuy stands apart in the POS space, by completely removing late fees for consumers, only charging fees to merchants, and we make no money from customer data.
It is in nobody’s interests to have financially-delinquent customers or customers with affordability problems. That’s why it’s so important for POS finance providers to undertake rigorous due diligence on credit applicants, to help consumers make informed and considered purchasing choices based on affordability.
At DivideBuy, our entire ethos is about empowering consumers with flexible buying power, and we look at the individual’s past and present circumstances to gain the clearest possible picture of their financial health. When we consider credit applications, we use Soft Search credit checks that won’t harm the applicant’s credit score. Our thorough affordability checks and highly-efficient automated underwriting process means that we have a delinquency rate under 3%, which is far lower than competitors.
I joined DivideBuy in 2022 precisely because I was so impressed by its consumer-first ethos, which is at the core of everything it does. Unlike other POS finance providers, our business model is not based on charging consumers late payment fees, but on helping consumers make informed purchasing decisions based on affordability, by offering instalment repayments over longer periods, deposit weightings and payment holidays.
Responsible lending makes for sustainable businesses
Just as with any other form of credit, there are benefits and pitfalls to using POS finance. There are risks to consumers, merchants and lenders. There needs to be consumer accountability in how POS finance is used. But when used correctly, and responsibly, it can be an incredibly convenient and useful way of making life’s big purchases more manageable.
Raising awareness, screening out customers likely to be delinquent, and ensuring credit approvals based on stringent affordability checks, will go a long way in deepening the trustworthiness of these solutions.
By working together, engaging in dialogue and making POS finance as clear and as transparent as possible, regulators, LendTech providers and merchants can ensure that consumers get the education and protection they need to use POS finance in the right way.
With so many myths surrounding POS finance, there is a need for continual awareness and education to ensure that consumers and merchants alike can make informed decisions about what payment method, or provider, to use. As an FCA-regulated lender, DivideBuy puts the consumer at the heart of our business, and we’re committed to driving the change we wish to see in the industry, by ensuring fair, ethical, accessible, fee-free consumer lending practices that work for both consumers and merchants.