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How To Offer Finance For Customers In The UK

How to offer finance to my customers UK

In the modern business world, convenience is everything to a customer. In the past, when it came to products or services that charge a high cash price at a store, the only option was to save up for some time and pay it all at once. It’s become increasingly more common to create instead a payment plan, known as financing, or buy now pay later.

The “Adobe Digital Economy Index” report for Q1 2024 revealed that spending through Buy Now, Pay Later (BNPL) services in the UK reached £3.95 billion, a significant increase from the previous year, indicating that this payment plan is here to stay.

In this article, we will go over the different ways financing can be done, its pros and cons, and what businesses and customers should know.

Buy Now Pay Later In The UK

Typically, the way buy now pay later works is that you get the service or product immediately, and pay for it over time through monthly payments. Sometimes, especially for very expensive products, the customers will be expected to pay interest charges.

To qualify for the option of monthly instalments, the customer must pass a soft credit check that is affordable for most. Unlike with traditional credit checks, you can apply online or in-store through various avenues.

Monthly Payment Schemes

BNPL Companies

The following are some BNPL providers that you may have heard of:

  • Klarna – Klarna is the global leader in BNPL. It’s known for its “pay in 3” instalments and financing options, as well as a virtual shopping app.
  • Clearpay – Clearpay is known for its four-installment payment plan. It’s used most often in fashion and beauty purchases.
  • Laybuy – This allows you to spread payments over six weeks and is accepted by a range of retailers.
  • Paypal Pay in Three – Paypal Pay offers a simple three-installment point when choosing them as a payment option.
  • Google Pay – Google Pay offers various monthly payment options.

 

Pros And Cons

The following are the pros and cons that come with a business opting to make BNPL one of their payment options.

First, the pros.

  • Increases Sales – An ongoing research collaboration between PYMNTS and PayPal, titled “Buy Now, Pay Later: Millennials and the Shifting Dynamics of Online Credit“, found that BNPL options increase the likelihood of a sale by 20% to 30% and can boost the average ticket size up to 50%. This essentially highlights that offering BNPL as a payment method is a sure way of increasing revenue.
  • Attracting New Customers – Ascent’s 2021 Buy Now, Pay Later Survey showed that 55.8% of BNPL users have reported buying something that they wouldn’t have if not for the option of buying it through partial payments. This is a staggering figure, as well as pretty conclusive proof of the efficacy of BNPL.
  • Competitive Advantage – With the other two pros above, it’s reasonable to make the statement that companies that do not offer BNPL will be at a disadvantage over those that do.

 

As for the cons.

  • Potential For Debt – BNPL can encourage impulsive buying in some customers. A study from Buy Now, Pay Later and the Cost of Living Crisis (2023) found that one in ten BNPL users struggled to make repayments. This can result in difficulties in receiving missing payments from a business perspective.

 

Monthly Instalments And Traditional Credit

Buy Now, Pay Later offers great flexibility for a small business. Some businesses, however, deal with much larger purchases that would still amount to a lot of money in monthly payments. For those businesses, a traditional credit scheme is much more effective.

As the name implies, traditional credit options, such as personal loans or store credit, are not anywhere near as new as BNPL. This offers a more extended repayment period as opposed to most BNPL offers, sometimes ranging up to years. That being said, there is a lot of potential to pay interest when dealing with traditional credit, especially if it’s an expensive product being paid over some time.

Understanding The Credit Process

The short-term nature of BNPL allows many companies to sidestep an in-depth credit check. But when a company is offering an expensive product or service over a long period, it’s considered a risk just like any other type of loan.

This means that a credit report is typically required. A customer’s credit file will be held by specific credit reference agencies, such as Experian and Equifax, who have details concerning their borrowing and repayment history. This information is then weighed up against the risks, which then determine interest rates.

Interest Rates – Promotional vs Charged Interest

One way to attract customers to your business is by offering promotional interest rates in your financing options. The difference between this and charged interest (standard) is that the interest rates are incredibly low for some time. Sometimes, the promotion is outright interest-free instalments.

However, it’s important to note that promotional interest rates are almost always time-limited. It’s important to be transparent about this, to ensure that customers make informed decisions, as the promotion has a high potential to generate a large amount of goodwill with customers.

A study titled “The Impact of Promotional Financing on Consumer Spending: Evidence from Credit Card Field Experiments” created by researchers at the Federal Reserve Bank of Chicago found that 0% APR (promotional interest) increased credit card spending by around 38% in the first three months of a promotion.

Options to Buy Now but Pay Later

Guidelines For Business Offering Finance

As we’ve already outlined, offering finance options is a great way to boost sales at your business. However, the following factors are considerations all businesses should make:

  • Eligibility – Ensure that your criteria for eligibility are clear and focused. This may include minimum credit scores or income requirements. For BNPL, these credit scores can afford to be quite soft, as many who use these financing options are younger customers. But for traditional credit on large purchases, it’s important to scale the interest monthly amount to the risks of lending.
  • Fees And Charges – Transparency is key. The FCA mandates clear disclosure of all fees associated with BNPL, including late fees and late payments on an outstanding balance. Consumer organisations like Which? consistently stress that all costs should be displayed, as many have begun to complain about hidden fees often associated with non-standard payments.
  • Payment Terms – BNPL and sometimes traditional credit come with highly customisable and flexible repayment options. The schedule should be clear, provided upfront, and give timely reminders of when they’re due. Furthermore, for long-term deals, sometimes offering the option to delay payments can provide relief, and can prevent missed payments during times of unforeseen hardship.
  • Beware Of Buyer Protection – BNPL providers are authorised and regulated by the FCA, and ensure robust protection from various scenarios, such as unclear terms, fair handling of complaints, and sometimes even compensation through the FCA themselves if the issue is escalated.

 

Conclusion

Overall, offering finance to your customers has been proven to increase revenue, and is a much-beloved payment option. However, it’s always important to remember that a good practice is to be upfront about all fees and expectations concerning your finance options.

FAQ: What happens if I miss a buy now pay later payment?

The consequence of missing a BNPL payment differs depending on the specific terms, the provider, the length, and if the plan will charge interest.

  • Late Fees – Most BNPL providers will charge late fees for failing to make the monthly payments. Typically, the late fees are a percentage of the overall amount, something along the lines of 5%.
  • Interest Charge – BNPL providers suffering from missed payments may end up charging interest on the outstanding balance. Over time, this can increase the overall cost of the product to the customer.
  • Account Restrictions – Failure to meet monthly instalments several times can lead to the account of the customer being restricted if not outright banned.
  • Credit File Impact – BNPL companies typically do not report missed payments to credit agencies. However, if missing payments continue to occur and the provider begins to suffer losses as a result, reporting may be on the table. This, of course, will negatively impact the customers’ credit scores.
  • Debt Collection – Extreme cases of missing payments can result in providers turning to debt collection agencies as a means to receive their lost profits.

 

To help a customer manage their payments more easily, consider offering several popular options of BNPL companies as providers. This allows customers to easily consolidate their debts, instead of keeping track of several and coming up short. At the end of the day, a customer will always prioritise their immediate needs, such as groceries and home bills, over partial payments.

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