The retail industry has successfully navigated a period of uncertainty in recent years. Retailers have improved every step of the customer journey by plugging into technology to respond to challenges such as the COVID-19 pandemic and supply chain disruptions. Shoppers today enjoy a better, more personalized customer experience than ever before. We can buy goods and services online or offline, choose to have our purchases delivered in two hours or two days, buy “off the shelf” or customize our purchases – whatever suits us best.
However, during this era of inflation and high interest rates, retailers have a new struggle: providing choice and personalization in consumer financing.
The Evolving Landscape of Consumer Financing
For most of the last half-century, credit cards have been the primary solution for purchase financing. Analysis by McKinsey states that credit cards remain the most popular unsecured borrowing in the United States. Credit card borrowing accounts for 78% of balances, with a 10% growth in transaction volumes in recent years, contributing to transaction values of $49 trillion in 2021.
However, the credit card is beginning to slow as a legacy solution. Traditionally, the credit industry has worked around, rather than with, the increasing segmentation of borrower profiles. Significantly, this limitation is manifesting in the form of a demographic gap. Research commissioned by GlobalData revealed a marked rise in the percentage of under 35s not possessing a credit card — 47% in 2022, compared to 39% in 2016.
Instead, younger and underserved shoppers are adopting point-of-sale loans embedded in the customer journey as an alternative to credit cards. These demographics enthusiastically embraced Buy Now Pay Later (BNPL) as an attractive alternative for consumer financing. BNPL offers convenience through competitive APR rates, predictable repayment schedules, and flexible approval requirements. However, it has its limitations. Originating from the fintech industry, new regulations by the Consumer Financial Protection Bureau threaten BNPL providers as loan defaults grow.
Additionally, this type of loan is only suitable for small-ticket items. Shoppers need an alternative to finance big-ticket purchases such as furniture, electronics, home improvement, jewellery, etc. And while plenty of other lending products are available for these purchases, retailers struggle to offer their shoppers a choice of financing options at the point of sale.
The Challenges of Existing Embedded Lending Frameworks
Embedded lending is experiencing rapid growth, with market revenue reaching US$4.7 billion in 2021 and projected to rise by US$32.5 billion in the next decade. However, given the complexity of embedding multiple lenders into omnichannel customer journeys, currently, most retailers offer a single-lender solution.
This single-lender model limits retailers’ ability to provide financing options that cater to their customers’ needs and preferences. Lenders typically specialize in specific financing products, such as installments, 0% APR, BNPL, lease-to-own, etc., targeting specific customer segments – prime, near-prime, or subprime. This limited financing focus leads to poor approval rates, abandoned carts, lost sales, and customer dissatisfaction. Furthermore, relying on a single lender exposes retailers to the risk of changing lending conditions, especially as lenders tighten their underwriting strategies and approve lower approval rates and transaction values.
Retailers know this, and many attempt to integrate a second lender into their offer. However, this approach results in a heavy lift for the retailer and a poor and fragmented experience for the customer.
However, this is changing. The technology enabling retailers to embed multiple lenders into omnichannel customer journeys is now available.
An increasing number of retailers are embracing a platform-first approach to point-of-sale financing.
Unlocking the Potential of Embedded Lending in Customer Journeys
Given the difficulties in managing multiple lenders, retailers are adopting a platform-first approach quickly. ChargeAfter’s embedded lending platform enables retailers to easily configure a waterfall of lending options that address all credit profiles from credit-invisible to super-prime and everything in between into omnichannel customer journeys.
This model benefits all of the players in the ecosystem. Retailers offer flexible financing options to customers at their moment of need, resulting in up to 85% approval rates, increased sales, higher average order value (AOV), and improved customer satisfaction and loyalty. Shoppers access financing choices from trusted lenders, enabling them to purchase the goods and services they desire with the terms and conditions that best suit their needs and preferences. Lenders, in turn, gain direct access to customers needing their services. This comprehensive solution creates a win-win-win situation for the entire consumer financing ecosystem.
About Kevin Lawrence
Kevin has worked in the banking and finance industry for over a decade. He has worked closely with some of North America’s largest banks and financial institutions and retailers. Kevin is an expert in embedded consumer financing, with a deep understanding of current trends and where the industry is heading.
