The myths and opportunities of 0% finance
The appeal of 0% finance offers to end users is clear - it's free. It offers a quick and easy way for them to purchase the high-value goods or services they want, without a hefty upfront cost.
However, it is easy for retailers considering offering a point of sale (POS) 0% finance option to think that this translates into a free service for everyone. Not quite. You have a choice, to either subsidise the cost of a 0% credit option yourself or to pass on this subsidy to your customers (partly or fully) in the form of an interest-bearing loan.
For example, a part-subsidy from your business could translate into a loan at, say, 3.9% interest for the customer. It's - obviously - less of an incentive for the customer to purchase but helps to protect your margins.
Many retailers absorb the cost of the subsidy in order to provide the most competitive service they can. Of course, the challenge is to balance those costs with the myriad of benefits and opportunities that a 0% finance offer can add - and to ensure that it ultimately enhances the bottom line.
Here are some of the things you should think about.
What will it cost me?
The genuine answer is - it depends. As outlined above, you could subsidise the cost of 0% and, while it's highly like to boost sales, it also reduces margins. To help with this, we charge the full subsidy in a single, upfront payment so you can factor the cost into margins from day one.
Few finance providers offer a one-size-fits-all solution, and you should be wary of those that do. Retail is an enormous and diverse sector, and a solution and pricing structure which works beautifully for one retailer may not be the best fit for another. Some solution providers charge a setup cost or monthly fees, but again, these aren't essential - Duologi doesn't.
You need to think about the deposit that you will ask your customers to make upfront and how to balance repayment risk with customer attraction. We can advise you on the best balance to strike. This is likely to depend on the types of products being sold.
If you sell online - and given the enormous growth in eCommerce, most retailers should certainly be considering it - one area to be particularly wary of when it comes to calculating the cost of a POS finance solution is the impact of integrating with your existing eCommerce platform. Your provider should already offer plug-in to whichever eCommerce platform you are using - bespoke integrations will cost more.
Another potential cost to think about is the rate of basket abandonment if your 0% finance offering takes too long for customers to apply for. At Duologi, we've worked hard to ensure that our application form is optimised for all devices, takes under three minutes to complete and presents a decision instantly to over 99% of customers.
You should also be aware of the potential need to get an FCA license further down the line. With Duologi, we can guide you through this process, and you don't need one to get set up in the first place - just a positive balance sheet, 12 months of trading history and a turnover of more than £250,000.
What are the risks?
You also need a careful approach to risk management. Two clear areas of risk to be aware of are your liabilities under the Consumer Credit Act 1974, and what happens after the interest-free period if the customer has not completed their payments.
Under Section 55 of the Consumer Credit Act, you are required to provide customers with relevant documentation and explanation of the risk associated with entering into a credit agreement. Fail to do this and you risk a fine from the FCA - more costs. Under Section 75, customers who believe there has been a breach of contract or misrepresentation on your part or that of your credit provider are able to make a claim.
Once the interest free period is over, there is also a risk of customers who have not made all their payments failing to complete or being unable to afford the new rate. Mitigating this risk requires a careful (yet also quick and easy) approach to screening at the outset.
What will it offer me?
Those are some of the costs to consider. But, managed correctly, the benefits of a 0% finance offering will massively outweigh them.
For a start, innovative and varied finance options can help you attract new customers and convert existing ones who may have otherwise been unable to complete a purchase. A lack of payment options has, in some cases, been shown to reduce online sales by up to 30%, whilst customers are empowered to increase their basket size when they know that they can pay gradually, or at a time that best suits them. As such, enabling customers to spread the cost of their purchase over a longer term, with no interest to pay at the end, should ultimately increase both your sales volumes and your average order size.
Then there's customer experience to think about. 0% finance solutions put your customer first, enabling them to pay for goods and services in a more flexible and customer-centric way. Offering a good solution can be a way for you to demonstrate that you understand their needs and the challenges they face. Customer finance is becoming increasingly common, so showing that you understand it, and offering a solution which genuinely costs your customers nothing, can position you as a truly forward-thinking business.
Harnessing the opportunities
The upshot of all this is that retailers seeking to offer 0% finance to their customers should think very carefully about the partner they work with, and work with them to develop a bespoke solution which meets both their needs and those of their customers. POS 0% finance should be quick and easy to implement and to access - and if that is achieved, then it can be a fantastic sales tool.