November 29, 2024- Modern-day finance looks nothing like it did two decades ago. The consumer financing market has experienced significant growth. The rise of financial technology, or fintech, has revolutionized how customers and businesses manage their finances. More specifically, consumer financing has transformed how people spend.
By allowing customers to defer payments and break them down into smaller chunks, businesses attract a broader customer base. Consumer financing is the latest fintech trend in modern commerce, a strategic play that increases your reach and fosters loyalty. Should your business hop on the profitable bandwagon? Here’s what you need to know.
What Is Customer Financing?
When you offer customer financing, you give customers the option to pay for the purchases over time instead of in one lump sum. Consumer financing lets you sell your products and services more affordably, helping to attract more customers and encourage higher-value transactions.
One common example of this is point-of-sale (POS) financing. POS financing differs from other payment options like credit cards because it acts as a sales tool that differentiates you from other businesses that don’t offer tailored payment solutions. With point-of-sale financing, customers can pay for things through installments, lines of credit, and low APR loans.
Other key players in the fintech customer financing space include:
- BNPL providers, such as Klarna, Affirm, and Afterpay
- Store credit cards and leasing or layaway programs (these vary by retailer)
- Private POS financing through merchants and service-based businesses like HVAC companies or chiropractors
- Financing platforms like Finturf that work with a large lending network
While figuring out how to offer customer financing may seem complicated, it’s actually quite simple. Some businesses opt for in-house financing, which is when the business acts as the lender and provides financing directly to customers without a middleman or merchant. This requires having the funds to front the program and the logistics associated with it.
If you don’t yet have the capital to offer in-house financing, you can partner with a third-party provider that has the resources to offer a variety of funding options to your customers. This is a good choice if you want to provide flexible options and onboard an application process that is quick and simple, lengthy applications that require customers to jump through hoops to prequalify for financing make it less likely you’ll earn their business.
The Growth of Fintech and Customer Financing
Fintech innovations have democratized financing for consumers. Digital platforms and payment apps grant access to financing better than traditional banks and retailers ever could. A recent survey found that most Americans (89%) are experiencing some degree of financial stress, with more than half (56%) saying they depend on digital financial tools to navigate these challenges.
With the fintech industry raising record capital over the last decade, introducing a financing solution in your business has never been easier. Revenues in the fintech industry are predicted to increase nearly three times faster than traditional banking revenues between 2023 and 2028.
Shoppers seek flexibility when prices escalate and interest rates rise. Experts predict that consumers will continue to leverage financing options like buy-now-pay-later and POS financing to fund purchases.
How Customer Financing is Transforming Consumer Behavior
What was once rigid and limiting, the payment process has evolved to accommodate more flexible approaches to revenue. Today’s customers want options and alternative payment solutions, the ability of businesses to meet buyers where they are has the potential to transform how you make money and retain customers.
The Psychology of Customer Financing: Encouraging Spending Through Flexibility
Features like pay-over-time, deferred billing, and installment plans make for a more enjoyable buying journey. When customers experience a positive interaction with a company, they’re more likely to make a confident purchase, and remain loyal long term.
Many businesses that accept credit cards (or offer their own cards using a rewards incentive) know how convenience can help encourage spending. Customers are also more likely to spend “future” money than “present-day” money. This perceived “delay in spending” is one of the reasons why customers who don’t pay in cash spend more than those who do.
Impact on Purchasing Power: Enabling Consumers to Afford Bigger-Ticket Items
Flexible payments via financing go beyond convenience. Offering financing reduces the perceived burden customers feel when staring down a large payment and allows them to budget more effectively.
Not only do you cater to a more inclusive customer base with varying financial situations, but you also experience a boost in sales from shoppers who don’t need to put off their purchases until they build up enough savings. Such flexibility breaks down these barriers, allowing customers to take on larger projects they might have thought were out of reach and commit to higher-value purchases.
Benefits of Customer Financing for Businesses
Customer financing can encourage larger, more frequent purchases and attract more buyers. Put in even simpler terms, consumer financing helps boost sales that drive your bottom line. Here’s why:
- More purchasing power: Financing encourages higher-value transactions. Businesses that incorporate a POS option experience an 87% increasein average order value.
- Increased conversions: When offered flexible purchase options, customers are more likely to pull the trigger. In fact, implementing financing can boost sales volume by 27% or more.
- Larger customer base: Catering to a more diverse group of customers expands your reach. Roughly 58%of millennials say they’re more likely to shop at and return to stores that offer BNPL. This offering also boosts customer loyalty and satisfaction.
Gut check: Should you offer financing to your customers? And if so, what type of financing is best for your business? There are obvious benefits to the service, but it’s not without its risks. Think about whether you can afford the administrative expense and the risks incurred with taking on debt.
For example, if you opt for in-house financing, you are responsible for the costs associated with hiring accounting and financial personnel, purchasing new software, performing underwriting, and paying for credit checks. Third-party financing companies typically charge a fee from 1% to 20%, depending on the product, service, and industry.
The Future of Customer Financing in Fintech
Moving forward, we expect the fintech industry to continue building more mature solutions for financing, including the evolution of digital payments and payment apps. Financing options will become so mainstream that they’ll be grouped into everyday conversations like credit cards, which many consumers see as a norm.
One of the biggest roadblocks to financial health is lender reliance on credit scores as an indicator of a borrower’s ability to repay a loan. Alternative financing solutions can change this by relying on alternative data to paint a fuller picture of someone’s finances, such as employment history, pay stubs, or utility bills. Such approval methods could unlock opportunities for the more than 25 million Americans who have thin or no credit and would struggle to receive traditional financing.
Final Thoughts
As your business brainstorms ways to stay relevant with consumers, don’t forget to consider the inclusivity of your payment processes. Consumer financing is a fintech trend that’s here to stay, so it’s important that you make it part of your business strategy.
Reference:
https://retail-today.com/how-omnichannel-pos-financing-solutions-can-increase-loyalty-and-spend/
https://oneop.org/2024/02/21/understanding-the-cost-of-convenience/
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