Acceptance rates vs subsidy rates

Thinking of introducing point of sale (POS) finance? You're probably interested in how much it is going to cost.

Tuesday March 12th 2019

Acceptance rates vs subsidy rates

Thinking of introducing point of sale (POS) finance? You're probably interested in how much it is going to cost.

Two of the key things to understand when weighing up the costs - and the potential benefits - of POS finance - are acceptance rates and subsidy rates, and how they relate to each other. Here's what you need to know.

What are subsidy rates?

As a business offering POS finance you have the choice of either subsidising the cost of a 0% credit option yourself or passing that subsidy onto your customers (partly or fully) in the form of an interest-bearing loan. With no subsidy at all, the customer pays full interest on their loan. With a part subsidy they pay a lower rate of interest, and with a full subsidy they pay 0%.

For example, a part-subsidy from you could translate into a loan at, say, 3.8% for the customer. The advantage - it protects your margins. The obvious disadvantage is that it's less attractive prospect for the customer.

Fundamentally, subsidies help you to sell more volume and increase your basket size, because they make finance cheaper for the customer - but there is variation depending on the sector you are in and the margins you make. Sectors with healthier margins can better afford full subsidies.

This is where we come in. We charge the full subsidy in a single, upfront payment so you can factor the cost into your margins from day one.

What are acceptance rates?

Acceptance rates do what they say on the tin - they denote the rate at which customers applying for POS finance are accepted.

Technically, this has nothing to do with the subsidy rate, as acceptance is based on the credit risk of each customer. Acceptance rates are dependent, therefore, on the type of people applying for finance, and the market your business operates in.

As a merchant, you have a certain amount of control over this through your marketing efforts. We can also use a range of techniques to point you towards the right demographic to ensure that you attract more customers who are likely to be accepted. (It is, however, important to bear in mind that certain businesses may be less able to appeal directly to the most credit-worthy individuals).

However, it is possible for Duologi to factor the acceptance rate into the subsidy of the loan. That is, to ensure that business is accepted only if it generates an acceptable yield. If we can achieve the right yield on the loan we make to your customers, then we can accept the business. Higher-risk business simply requires us to cover our risk.

Which customers are deemed higher-risk? Essentially, those with a weaker credit history - or none at all - which means that we have less guarantee they will pay back their loan. So, if they wish to take out POS finance to pay for goods or services from you, we would need to charge a slightly higher subsidy to get them accepted.

In practice, this higher subsidy can be charged either directly to the end customer (as a higher interest rate - for example, 19.9%) or it can be picked up by you as the retailer. You have a flexible choice. How the interest rate (or the price of the loan) is packaged to the customer can remain full, part or nothing.

Ultimately, then, the cost/benefit balance of offering POS finance is not about the subsidy charged - rather, if there is a higher acceptance rate, more business will go through and you can generate more sales. At Duologi, we are always looking for ways to improve acceptance rates and enable you to sell more. It's win-win.

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