Interest-free payments have taken the UK economy by storm. As the use of credit cards begins to whither, and as the interest-free credit sector measures out its expanding £10 billion worth, the transfer of goods and services has never seemed so seamless.
James Bradley is Director of Sales and Business Development at leading LendTech, DivideBuy, which offers integrated interest-free lending solutions for retailers. In this article, he explores how the interest-free instalment credit model has been reinvented for the digital age and is opening up a new world of opportunities for merchants:
Thanks to fintech, new generations of consumers are taking advantage of the flexibility, affordability and convenience of interest-free payment, and merchants are reaping financial and operational benefits.
The arrival of fintech players and their innovative approaches to traditional forms of financing has revolutionised instalment payments, which were considered to be a rather “unsexy” form of finance until recently. The use of data analysis, automated Know Your Customer (KYC) and credit scoring processes have enabled fintechs to solve several pain points for merchants and to open up new growth opportunities.
The latest statistics show that just in the UK alone, the interest-free credit sector’s value is worth nearly £10 billion – and that’s just accounting for only 5% of all eCommerce in the UK. Even though this sector is in a nascent growth stage, these figures should be enough to whet the appetite for any merchant. The sector is set to grow by a staggering 175% to be worth £26.8 billion by 2024.
Usage of interest-free instalment credit products almost quadrupled during 2020 and is now at £2.7 billion in the UK. People were already flocking to eCommerce even before pandemic-driven lockdowns drove up online sales even further, and over five million people have used interest-free credit since the pandemic began, a rise of 9% from 2019.
Although credit cards continue to be a popular way of spreading out payments because of the consumer protections they offer, interest-free instalment payments are proving to be far more attractive to consumers and merchants. In fact, nearly a quarter of consumers (23%) are using interest-free payment solutions to help meet their financial and budgeting needs. This usage of interest-free credit solutions is also not restricted to just the younger generation of shoppers that it’s associated with.
The shift in consumer behaviour caused by the Covid-19 pandemic, specifically the move toward eCommerce as the main customer channel, has resulted in members of all age groups taking advantage of the financial freedom that interest-free credit can provide. Additionally, the increased usage of digital commerce platforms has led many consumers to research how they’re spending their money online, resulting in the most well-informed group of digital consumers ever seen.
Why Interest-Free Credit Appeals to so Many Consumers
What makes interest free credit payment so appealing is that it solves several pressure points in merchant conversion rates, credit risk and customer financing, including lack of fee transparency, credit risk and consumer wariness of credit cards with high APRs.
By offering affordable equal payments through integrated technology platforms, merchants can speed up and streamline the approval and customer application process. The use of smart risk and credit scoring algorithms can instantly determine risk for both the merchant and the customer. In some cases, customers can be approved for interest-free instalments at the moment they buy at the merchant’s in-store point of sale or online checkout. And the beauty is that even if there are any affordability issues, the merchant is protected.
Many solutions offer the customer a choice in how they want to pay in full, such as full payment after 30 days, a number of interest-free instalments over a set period of time, or for customers willing to spread the cost over a longer timeframe, they have the flexibility to choose a repayment period to suit their finances and basket size.
For merchants, there are countless benefits to working with an innovative credit provider, such as receiving payment for goods or services sold as soon as the order has been placed or delivered. All the while the customer retains the ability to spread the purchase in a clear, affordable way – and one that explicitly indicates exactly how much they need to repay and when. Giving customers the choice over how and when they pay, without racking up interest or hidden fees, empowers customers to feel in control of their finances.
Perhaps most importantly for the modern consumer, some of the latest platforms are trending toward using ‘soft-search’ protocols for credit checks. Short-term credit facilities have long been associated with lowering a consumer’s credit score. The ability to apply and be approved based on a non-recorded ‘soft-search’ is a critical tool for convincing consumers that the new wave of flexible finance options are not just accessible, but also safe to use for those looking to retain a good credit score. It’s undeniable that interest-free credit options are disrupting consumer buying, both in the bricks-and-mortar and online spaces, and marks yet another revolutionary advance made by fintech players.
For eCommerce merchants, by integrating interest-free credit options seamlessly into their online payment page, they can give customers a frictionless payment experience that will encourage repeat custom. One of the most common reasons for cart abandonment is price – by spreading the cost interest-free, merchants can increase average basket sizes through increased cross-sell opportunities.
Consumer Education Is Key To Sustainable Success
It’s clear that the sector is going to take a much larger share of online and in-store retail payments over the next few years, and merchants are at risk of losing out on a lucrative revenue stream.
This surge in usage is not without its challenges, however, particularly with regulators paying close attention to sector standards. Younger consumers, in particular, may not have the money management experience of their elders and may be more likely to miss payments. In February 2021, the UK’s Financial Conduct Authority announced it would introduce new rules for the interest-free credit sector, to head off fears about growing debt levels.
But responsible lenders recognise that their success is only sustainable if they are transparent with their customers. It’s vital that providers educate their customers about responsible money management, debt advice and affordability.