The Credit Squeeze Hurting Merchants’ Online Sales

COVID-19 has had a profound impact on consumer behavior, one that will have a lasting effect even after the pandemic passes.   As consumers continue to be limited by travel restrictions and the number of people who can be in the same building concurrently, they are increasingly shifting their spending from in-store to online.  According to research by eMarketer, online sales have increased by 450% in 2020 in some sectors, largely driven by COVID-19.  But despite this surge in online spending, some merchants are still missing out on revenue opportunities.

What’s driving these missed revenue opportunities?   It is the credit squeeze between consumers and lenders.  Consumers need more credit to support their increased online purchasing, but lenders are making it more challenging to secure credit by imposing stricter borrowing criteria.  This causes many customers to be denied the credit they need to make the purchases they want, which in turn causes merchants to miss out on valuable sales.

Consumers are Spending More Money on High Ticket Items Online

Consumers are buying higher-priced items online, and also increasing their overall order sizes.   According to eMarketer, average order values through online sales is up 36% in the first nine months of 2020.   There are two key trends driving the spending hike:

Home Offices and Schools – COVID is driving millions of consumers who are now working from home or attending school remotely to make investments in their homes to facilitate better remote working environments.  They are buying furniture and home office technology to make working from home tenable over the long term.   

Recreational Activities – The second investment consumers are making is in recreational activities.  With many facilities closed or open in limited formats, consumers are exchanging gym memberships for in-home equipment, foregoing dining out for upscale cooking appliances, and trading travel for bigger and more sophisticated home entertainment systems, and staycation items, including outdoor furniture, camping gear, bicycles and more.   

Consumers Need Affordable Financing Options

Consumers’ home investments carry relatively high price tags, often exceeding their ability to fund for them upfront, or their comfort in financing at credit card interest rates.  Additionally, younger consumers may not even have a credit card.  A recent report by Business Insider stated that more than 60% of all Millennials do not even use credit cards, relying instead on cash and debit cards, which makes it harder for them to fund large purchases all upfront.

To address these concerns, merchants are beginning to offer their customers financing at checkout. This point of sale financing allows customers to pay for larger purchases over time (typically anywhere from 6 to 48 months) at an interest rate which is much lower than those of credit cards.

Consumers like point of sale financing because it enables them to spread the cost of large ticket purchases over a period of time, rather than all at once.  A customer may not be able to spend $2,000 on an in-home spin bike but is happy to pay $50 per month over the course of 40 months. On top of that merchants often subsidize the cost of the loan, binging the interest rate down to 0% or near 0%.  This is far cheaper than the average 15% interest rate consumers incur on their credit cards.   

But Banks are Tightening Lending Requirements

Given the volatile economy, where many people are unemployed or at risk of losing their jobs,  it is not surprising that banks are making it increasingly difficult for consumers to borrow funds.   Many lenders only offer prime credit, which is available to only the lowest-risk borrowers. Prime lenders look at different factors including credit history, credit rating, income level, and history, and existing debt utilization. Customers who fail to meet the strict requirements or are considered a high-risk borrower, are not approved.  While the lender may have avoided high risk, the merchant loses the sale. The data show that when only prime credit is offered, roughly 70% of applicants are turned away.  This is a tremendous risk to merchants. 

How Merchants Can Avoid Getting Squeezed Out of Sales

Merchants who want to cash in on these trends of larger online purchases need to eliminate the credit squeeze.   The best way to eliminate the credit squeeze is to increase the supply of credit at checkout.   Not only do retailers need to offer consumers more financing options, they also need to make sure they provide options that meet the needs of customers of varying credit profiles, including prime, near-prime, and subprime. 

Merchants should think about point of sale financing in the same way they do credit cards.    They don’t partner with just one bank to accept only their credit cards.  Rather, they partner with platforms including Stripe and Authorize.net to accept hundreds of credit cards across every bank and network.  That one partnership allows the retailer to accept any credit or debit card, regardless of whether it’s a Citibank issued VISA card, a Chase Mastercard, or an American Express Platinum card.   So too should they do with point of sale financing.  Rather than partnering with one lender who lends exclusively to prime borrowers, retailers need to partner with a platform that will allow them to provide multiple financing options to customers across a broad range of credit profiles.