Rise of Consumer Financing: 5 Factors Driving This Trend

The contemporary financial landscape has significantly shifted towards consumer financing, driven by technology, evolving consumer behavior, and changing economic conditions. Point-of-sale (POS) financing allows consumers to purchase goods and services, especially big-ticket items, by accessing loans embedded into the customer journey. It presents an alternative to traditional financing methods like credit cards, debit cards, and cash. This rise is facilitated by embedded lending platforms like ChargeAfter, which have revolutionized the retail space by enabling businesses to offer diverse lending options to their customers.

Consumer financing products are diverse and tailored to meet the various needs of customers. These financial tools range from Revolving Credit Line and Long-Term Installment Loans to Buy Now Pay Later (BNPL), each designed to facilitate purchasing, provide flexibility in payment, or support specific financial goals. Understanding these products and finding the right fit can be essential in retaining customers and increasing sales. You can read more about the different consumer financing products available and explore the various options for POS Financing Products for retailers here.

Let’s delve into five major factors contributing to this upward trend.

1. Rising Consumer Demand Amid Inflation and Rising Interest Rates

ChargeAfter data shows that applications for POS financing significantly increased in Q1 2023 compared to the same period in 2022. This trend looks set to continue, as shoppers seek flexibility in a time of escalating prices and rising interest rates. Consumer financing is predominantly prevalent for high-priced goods and services like furniture, electronics, jewelry, home improvements, and wellness offerings. However, inflation has also driven shoppers to apply for financing for lower-cost items. This trend directly results from consumers’ necessity to maintain their purchasing power amid adverse economic conditions.

2. Aversion to Credit Card Debt Among Millennials

The fallout from the financial crisis of the early 2000s profoundly impacted Millennials, who are now more aware of the pitfalls of credit card debt than previous generations. This awareness has led to a growing interest in alternative financing options.
A recent nationwide survey by the Federal Reserve Bank of New York revealed that concerns over ongoing price inflation are causing consumers to feel increasingly pessimistic about credit access. The perception of obtaining credit is declining, with 58% of respondents stating that it’s either much or somewhat more challenging to access than just a year prior. This issue is particularly prevalent among the younger population, as 57% of millennials have reported facing challenges related to their credit scores when trying to acquire financial products.

The aversion to high-interest rates coupled with the demand for favorable payment terms has paved the way for consumer financing to become a mainstay. The prospect of predetermined monthly payments and a clear payoff date makes this option attractive, enabling consumers to manage their debt effectively without burdening traditional credit card debt.

3. Efficiency and Integration of Contemporary Checkout Financing

The modern iteration of financing has brought significant improvements in efficiency and integration. For instance, financing has been seamlessly incorporated into the checkout process, much like well-known options such as Apple Pay, Visa Checkout, and Google Pay. This integration has successfully eliminated additional steps, thus removing potential barriers to conversion. About 25% of purchases are made through consumer financing at checkout for mid to high-ticket items. The simplicity of the application process, coupled with quick financing options, enhances customer satisfaction and leads to faster checkouts.

4. Diversity of Lending Options Increases Approval Rates

Consumer financing takes many forms, providing a greater likelihood of approval for most shoppers. Those with excellent credit may opt for higher payments at a lower interest rate for a shorter repayment period. On the other hand, someone with less-than-perfect credit may prefer more flexible terms. This flexibility is made possible due to the variety of lenders available, ranging from traditional institutions to lease-to-own offers. This diverse lender network can offer approval rates as high as 85%. Access to appropriate offers at the time of purchase significantly boosts the chances of transaction completion, leading to higher customer satisfaction.

5. The Role of E-commerce and In-Store Financing

The proliferation of e-commerce has had a profound impact on the growth of consumer financing. The ability to offer flexible payment terms online dramatically enhances the customer’s shopping experience, improving conversion rates and customer loyalty. Likewise, in-store financing allows physical retail locations to provide the same flexible terms and omnichannel experience, bridging the gap between the online and offline retail experience.

The Future of Consumer Financing

The rapid growth and acceptance of consumer financing, both in-store and online, are reshaping the retail landscape. By leveraging these financing options, businesses can meet the diverse financial needs of their customers, thereby enhancing the overall customer experience and fostering long-term loyalty. Consumer financing is not merely a trend but a powerful tool that’s here to stay in the evolving world of retail.

About Mark Denman
Mark has worked in the near-prime and tertiary lending space for 30 years. As EVP of Merchants Sales & Success at ChargeAfter, he is responsible for ensuring merchants and lenders get the best care possible.