Retail finance should be celebrated, not feared

Let’s face it: consumer finance gets a bad rap. Only recently did UK Finance release figures showing that debt on UK credit cards is growing at the fastest rate since before the financial crisis. The stats show that the annual growth rate in outstanding credit card debt reached 8.3% in February – the highest in 12 years. And the overwhelming response in the media was unsurprisingly negative, with the credit industry in general coming under fire. When looked at more closely, the report pointed to the more regular use of credit cards for smaller, contactless purchases as an explanation for greater debt being built up over short periods. It also showed that credit card debt is growing faster than other forms of debt, such as loans and payment plans. Nonetheless, fears are growing that the boom in household debt could turn into a bust and banks are clamping down on credit cards and other unsecured lending. A growing demand for credit According to the Bank of England, demand for credit from consumers has never been higher, and PwC says that British consumers show more credit confidence now than at any point since its survey began in 2009. What’s more, the proportion of consumers worried about their finances – the ability to make repayments and secure credit – has dropped continuously over the past seven years. It’s clear that consumers are more willing and more able to make purchases on credit than ever before. With that in mind, we should be looking beyond the grey cloud of doom that billows from these news stories, tarnishing an entire industry, and instead recognise the true benefit of consumer credit in many circumstances. When it comes to retail finance – payment plans or store credit cards, for example – having credit options available allows consumers to access the things they need when they need them, while boosting individual retailers’ sales, adding to the revenue of the entire retail sector and giving the wider economy a leg up. How tech can help The key to achieving these goals is through technology. Retail finance technology providers are working with multiple lenders to increase the likelihood of consumers being accepted for credit, while using the latest affordability check software to assess an applicant’s eligibility to enter a credit contract. Meanwhile, improved user experience and the ability to process an application on any device are reducing drop-off rates. Interestingly for retailers, this is demonstrated by the fact that 65% of customers that have used a retail finance platform say they only made the purchase because finance was available, while 59% would have bought elsewhere if it weren’t and 72% would have postponed their purchase. As a result, it’s not uncommon for retailers to see a 40% increase in average order values for finance orders and an increase of up to 60% in conversion rate after introducing a finance option. Thinking beyond retail An important point to note is that finance needn’t be confined to retail. Yes, enabling consumers to spread the cost of big ticket items like washing machines and laptops can hugely boost conversion and shouldn’t be underplayed. However, finance can also be applied to sectors like education and healthcare. Training providers and veterinary practices, for example, are increasingly looking to alternative payment methods to attract a wider audience and increase revenue. There are many people out there who simply couldn’t afford to pay to enrol on a training course or for surgery for their pet in one lump sum, and by offering payment plans, providers can capture these further sales. The cost of credit – the truth about APRs While more consumers are viewing cost-spreading as a smart financial decision, some still have a negative perception of it – and particularly APRs when applied to retail finance. But the cost of buying something on finance really isn’t that daunting. Take a £1,000 loan over 12 months, for example. If the APR were 9.9%, the total interest would be £52.08, making the monthly interest £4.34. Or, if the APR were 19.9%, the total interest would be £101.84 in total and £8.47 monthly – that's the cost of a couple of sandwiches or some magazines. A slightly higher APR doesn't have to mean extortionate costs for the customer. This is why almost nine in 10 consumers who are declined for their first finance offer are willing to take an alternative, sometimes at a higher APR – they consider it worthwhile for a little more financial freedom. Giving credit the credit it’s due The statistics speak for themselves: customers will and do seek out retailers who offer credit – whether as an instalment or a branded credit card. Consumers certainly aren't scared of credit and retailers shouldn't be either. No one wants consumers to get into debt, but the truth is that, with the tech available being so advanced, this needn’t be a given – stringent checks and clever algorithms ensure the right customer always gets the right credit offer. If used correctly, credit shouldn’t be shied away from – it should be celebrated as a win-win-win for the lender, the retailer and the customer. Richard Harrison is the financial director at Deko, a retail finance technology provider that helps consumers to spread the cost of their purchases