Manufacturers and Retailers Can Take Control of Fees in Their POS-Financing Programs

The in-house approach doesn’t just give retailers a “say” in what fees their customers will pay, it gives them total control over them.

In business, losing control means losing money. So if you’re thinking about providing point-of-sale, or POS, financing to increase your retail sales, you need to understand how taking control of fees can benefit your business by making financed purchasing more efficient, boosting customer loyalty and securing customers’ private information.

Having invented e-commerce, and transformed banking and investing, financial technology is rapidly altering the lending landscape, making POS financing more prevalent, more attractive to customers, and easier for sales and support staff to use.

In the US, demand for POS lending is growing at a much faster clip than traditional financing vehicles such as credit cards. More precisely, POS financing grew from $49 billion in 2015 to $94 billion in 2018 (inclusive), for a compound annual growth rate of 24%, says the consulting firm McKinsey. By 2022, McKinsey sees the US POS lending market accounting for $162 billion for a further CAGR of about 20%. Globally, this market may already have topped $400 billion, according to other industry sources.

Increase retail sales through POS financing

So what’s fueling this impressive growth? At root, two things: 

1. The advent of cloud and mobile functionality focused on POS financing. Technology has changed the game for brick-and-mortar retailers of all sizes. Smart, user-friendly technologies backed by advanced underwriting methodologies help traditional retailers compete effectively with e-commerce giants.
2. Mounting distrust of credit cards, especially among consumers under 40, who are likely to see them as a path to long-term indebtedness. Credit cards saw 7% CAGR in the years 2015 to 2018, and 6% CAGR in the years 2019 to 2021, and store-branded credit cards grew at a compound yearly rate of 5% in 2015-2018 and 3% in 2019-2021, says McKinsey. 

Make it as easy as possible for consumers

Convenience also contributes to the rise of POS financing. More than three-quarters of consumers surveyed by Citizens Financial Group in 2018 said access to a “simple and seamless point-of-sale experience” would increase the likelihood of their funding purchases through payment plans — overtly in preference to whipping out a credit card.

“Consumers want a simple and straightforward experience” when making financed purchases, Citizens says in its write-up of its survey. This finding supports the bank’s view that retailers should “modernize their payment model” by soft-pedaling credit cards and favoring POS installment financing.

Again, it may come as no surprise that younger consumers are leading the migration to POS financing with, says market-research firm Roy Morgan, those under age 40 accounting for three-quarters of such activity in Australia.

Choosing between in-house and third-party solutions

Retail companies that decide to offer POS financing have another important decision to make before they can proceed: whether to hire an third-party or do it themselves.

Third-party, or outsourced, options include names such as Affirm, AfterPay and Klarna. Full-service, tech-enabled in-house solutions from established companies like TurnKey Lender and nCino provide advanced cloud-based functionality for every stage of POS financing, from origination through collection.

Third-party providers are either lenders in their own right, or they function as go-betweens, linking retailers with the banks that, somewhat behind the scenes, actually do the lending.

The trouble with high fees on POS transactions

Transaction fees on POS lending may be inevitable, but they can still cause friction by making would-be buyers think twice, which can, of course, impede sales. That’s problematic when the very point of offering POS lending is to smooth the way to sales. Such fees can be as high as 6% of POS-lending transactions conducted by third parties.

Bank fees are another friction point. Retailers that provide POS financing through third parties must either absorb them or pass them on to consumers, and retailers have no say in how such fees are set. 

The best way to minimize fees and keep consumers interested in financing purchases by borrowing is for retailers to set fees themselves — which they can do if they use an in-house technology solution such as TurnKey Lender.

How to maintain control over the financing fees you charge

The in-house approach doesn’t just give retailers a “say” in what fees their customers will pay, it gives them total control over them. That’s because their lending program isn’t owned and operated by a bank, nor is it a mere conduit between a third party’s technology and any number of banks.

With an in-house lending program, there are no financial corporations lurking in the background. In fact, to the extent there’s a bank in the mix at all, that “bank” is you, the retailer backed by a smart, affordable and scalable full-service platform bolstered by on-site training and 24/7 support — that also empowers retailers to make their own infinitely flexible fee policies. 

This works to boost brand loyalty among consumers, who benefit from the retailer’s friendlier approach to fees. For customers of TurnKey Lender, this effect is further increased because they can “white label” their entire lending program, keeping the name of the tech provider from confusing borrowers about where the financing comes from.

Finally, besides giving retailers control over fees and branding, using software-as-a-service provider like TurnKey Lender lets retailers retain ownership of all the data generated by and for their POS financing, both to ensure the privacy of their customers and improve services over time.