Consumer Financing For a Post COVID World

Furniture World asked executives at consumer finance companies to comment on the best ways to alleviate current cash flow challenges and take advantage of opportunities to meet consumer financing needs going forward.

Flexible Options

“Consumer financing continues to be a key retail tool,” observed Mike Rittler, general manager, Retail Card Services, Personal Lending and Business Development at TD Bank. “It’s essential for retailers who want to effectively convert sales and increase tickets. These include deferred interest plans, equal payment plans, low interest rate plans, revolving products and installment loan products.”

Synchrony’s Jim Seger, senior vice president, general manager, agrees. “In the big-ticket finance area, we see an opportunity for furniture purchasers to compartmentalize their spend and leverage longer-term equal pay and installment loan products. As the retail space continues to open up, consumers are likely to keep increasing their spend on travel and entertainment, resulting in less disposable income available to purchase home furniture items. That will enhance the need for retail furniture stores to offer multiple financing choices during the purchase process.”

Challenges For Retailers

Seger told Furniture World that the biggest challenge for many of Synchrony’s retail partners in recent months has been to close gaps in the ways they offer consumers financing online.

“For many furniture retailers,” he explained, “big-ticket transactions can represent more than half of all sales.

“It doesn’t matter whether a retailer makes a furniture sale in-store or online, the process of offering financing needs to be overt and seamless. It is common for customers who have a general-purpose card to reserve it for normal everyday purchases only. They chose other options, for example an equal pay promotion to spread the payments out over an extended period. This not only gives them time to pay, it helps them compartmentalize their larger infrequent purchases separate from their day to day. It’s the retailer’s job to help customers choose the best payment option.”

“There’s been a lot of buzz in the marketplace about buy now, pay later,” Mike Rittler added. “It can be a little unclear what people mean when they use that term. The buy now, pay later language refers to short-term financing, for example, splitting up payments into four easy payments to handle chunks. That’s similar to TD’s equal payment revolving loans—a revolving product offering deferred interest over 12 to 18 months. The purchaser pays minimum payments for that period. Then there’s a bulk payment to make before the end of that expiration period. Another product offered on the revolving side is equal payment loans, for example, 24 months, 36 months, going up to 72 months. The biggest difference between revolving credit and installment loans is that equal payment plans don’t have an open line of credit that retailers can use to re-engage with customers, create loyalty and repeat behavior.”

Online Movement

All of the executives interviewed noted the importance of offering seamless consumer financing and repayment options.

Tony Cerino, Vice President of Sales for Katapult, a company that provides lease-to-own financing for ecommerce and omnichannel retailers, recalled that “When the pandemic started, many small and mid-sized merchants just weren’t prepared for the big shift to ecommerce. They had to scramble to update their websites and to make sure that pay over time options were well-integrated on their websites to support customers in their checkout experiences.”

“The pandemic accelerated the digital payments and transactions,” agreed Synchrony’s Jim Seger. “Those retailers that skillfully integrated financing into the customer’s digital purchase journey are doing well.” He added that finance options should ideally be positioned right on product pages, rather than waiting until items are chosen and in the shopping cart. “It’s critical, that product and financing are closely connected during online purchases because it can accelerate close rates.”

“Retailers who are behind the curve,” he added, “need to work with a partner who can help them put the right digital financing footprint in place. Large retailers may only need simple integration solutions, while smaller operations that don’t have big IT capabilities generally need more assistance.”

LTO Growing

Traditionally, lease-to-own was used by customers with poor credit, sometimes precipitated by life changes such as job loss, divorce or medical bills. Katapult’s Tony Cerino explained that the lease-to-own (LTO) landscape is changing.

“We are seeing younger customers choosing our lease-to-own solution due to its transparency, ease of use and flexibility. Ten years ago, a larger percentage of LTO customers purchased furniture items at standalone brick and mortar lease-to-own stores. These people often experienced difficult life and credit situations. That has shifted as the LTO option expanded more widely into furniture retail, giving customers who need payment flexibility, don’t have a credit card, or have thin credit files, the same experience offered to prime consumers.

“The difference between an installment loan or a revolving line of credit and a lease-to-own solution like Katapult is that the LTO company purchases products from the retailer and then leases them directly to the consumer through a lease-to-own agreement. The consumer agrees to make payments over time, typically up to a maximum of 12 or 18 months, with many ways to save along the way The customer’s repayment schedule is conveniently set to be weekly, bi-weekly, semi-monthly or monthly, to make the experience easy and convenient. Customers have options too. If they elect to go the full term and they make all of their payments, the customer then owns the items just like they would if they purchased the item any other way. Also, at any point during the LTO agreement, the customer can choose an early purchase option and save versus waiting for the contract to go full-term, or to return the item and no longer be obligated to make additional payments.”

Cash Flow Issues

“Typically, when a sale is made, furniture retailers will take a down payment payable in cash, check or some other form,” said TD’s Mike Rittler. “The remainder, financed using store credit, usually won’t be charged until delivery. For customers, that’s a nice feature of using credit. Unfortunately, long lead times for sold products due to supply chain issues are creating challenges. We’re authorizing transactions that won’t be posted until two, three or more months down the road. It’s the normal course of business for us when working with retailers who sell custom orders. But, longer lead times increase the chance for consumers to cancel orders and items are also coming in piecemeal. That can be frustrating.”

Katapult’s Tony Cerino said that “Customers almost always want delivery right away to take advantage of pricing or fill an important need. Since there’s not much in stock right now, the delay between making the sale and delivery has dramatically increased. Fortunately, customers are willing to be patient because there aren’t a lot of other options.”

“Some retailers are doing okay and others are struggling with delayed deliveries and payments,” adds Synchrony’s Jim Seger. “Not much can be done short term except to be transparent with customers. Having good consumer relationships is critical for retailers’ long-term success.”

Millennials’ Loan Preferences

Regarding changing consumer preferences for consumer loan products, Mike Rittler believes that certain shoppers prefer the experience of an installment loan. Equal payment loans drive sales growth, especially for millennials and Gen Z.

“Millennials are fueling a lot of consumption these days. It’s a substantial turnaround from two years ago when our research showed millennials lagging in consumption.

“In-store experiences, including financed purchases need to be seamless and easy. Many people still don’t want to touch terminals or kiosks, so retailers are using contactless options.

“Even as people have re-engaged with in-person shopping, the credit element of online transactions remains critical. Because there isn’t as much human interaction with an online purchase, retailers need to pay close attention to make sure that their presentation of financing online is well done to keep sales on track.

“The best omnichannel furniture retailers improved their online purchase experiences, making them as good as the best of the best online-only retailers. People expect that the purchase experience should be as simple and easy as buying from Amazon.

“They also made sure that transactions can be performed on any device—looking at ways to present credit alternatives so that people understand what’s available no matter how they choose to purchase furniture, bedding, rugs and accessory items.”

Other Best Practices

Communication. “The best retailers have focused on communicating with their customers, setting expectations and making sure they understand the current supply chain issues,” continued Rittler. “Doing that well is key. Overall, we haven’t seen an increase in complaints or disputes regarding credit, so it seems like retailers have done a really good job in communicating and setting those expectations.”

Waterfall Options. “We have seen smaller retailers, even single store operations that weren’t offering credit before, discover the power of waterfall credit programs, seamless options that offer primary financing loans, but also secondary and lease-to-own options from other lenders as part of the platform.”

Education. “Retailers that offer financing must make sure that customers clearly understand finance offers and terms by presenting this information in a way that’s easy to understand and keep for future reference. Typically, our retail partners are not doing the waterfall online. Sometimes the nuances such as a deferred interest program versus an equal payment program are easier to relate verbally, but whether they’re on their phone, a laptop or in the store, the process of offering credit needs to be easy and seamless.”

eCommerce Integration

“It’s important that retailers choose finance, BNPL (buy now, pay later), and LTO companies that make it easy to integrate with popular website platforms including Shopify, Magento, WooCommerce and others,” said Cerino. “The experience of understanding repayment options should be easy for consumers who choose to purchase online, taking them from application to checkout. In the case of LTO, our approach walks them through lease features, benefits and terms in a fully transparent way to make sure they get all the information they need to make an informed decision. Ecommerce happens 24-7, so 24-hour support centers and the ability to click a button and chat with an agent at any point in the process is a plus.”

Know What’s Happening

“Independent retailers need to look for speed and simplicity in the financing solutions they choose,” advised Jim Seger.

“They also need to know what’s happening with their consumers—why they’re buying and what they’re buying. Important areas to pay attention to include digital website integration, helping store associates understand how to offer furniture items from a financing perspective, business planning, analytics resources, and cost management.”

Positive Signs

“There are lots of positive signs out there including high demand for home furnishings, plus the savings rate and the level of debt paydown that’s taken place,” concluded Mike Rittler. “All of these indicators say that there’s money to be spent. The question is are they going to continue to spend it on items for the home including furniture or is consumption going to shift dramatically to travel and entertainment. Time will tell, but I think we will see dollars shift away a bit from the furniture space. Even so, spending on home furnishings will continue to be strong. I won’t be surprised if a number of retailers have record years this year and that momentum carries over into a very strong 2022.”