Even before runaway inflation started to dominate headlines, PYMNTS research uncovered that 57% of the U.S. population is living paycheck to paycheck, including 39% of consumers with incomes of $100,000 a year or more.
For many brands, these statistics present overlapping issues of payments choice, payment modalities and capturing consumers with the right financing option before they abandon. Those topics were at the heart of a conversation between Karen Webster; Orlando Zayas, CEO of lease-to-own (LTO) financing platform Katapult; and Marc Werner, founder and CEO of Nature’s Sleep, maker of the GhostBed.
The PYMNTS study called “Finding Retail’s Invisibles: Leveraging Flexible Digital Payments to Reach Underserved Durable Goods Customers,” done in partnership with Katapult, found that 43% of former LTO users are more likely to make additional purchases of costly durable goods with merchants that offer the option, with 22% saying they seek it out.
“In the durable-goods space, in this industry forever, mattresses, furniture, for big-ticket items, [over] 40% of transactions are done on finance, on credit,” Werner said. “You have to have multiple credit options available for the customer, otherwise you’re going to lose that person because they’re just trying to match up that bigger-ticket item with payments that reflect their income streams so they can term it out over a period of time. And it works really well.”
For many consumers, the issue isn’t as much about being able to afford to buy an item on some form of credit. It’s more about the timing of those payments — something not all buy now, pay later (BNPL) solutions adequately address. Some people just can’t pay for a new mattress or refrigerator in four installments.
Otherwise good customers can fall through the resulting gaps. And serving their needs is where Katapult shines.
“With lease to own, we tie the payment to their payday,” Zayas said. “It could be weekly, biweekly, monthly, semi-monthly. We also give them choice on when they can pay that off.”
Nature’s Sleep jumped on LTO early, becoming one of Katapult’s first customers. This wasn’t without initial confusion —Nature’s Sleep also offers BNPL options through Affirm. It made for a revelatory moment.
“The people that belong with Affirm didn’t want Katapult,” he said, because “[they weren’t] the right customer for that. The right customer needs to find the right payment solution. I started thinking, ‘We need a waterfall.’ I spoke to the Katapult people, and they agreed.”
Finding the Right Fit for Every Consumer
A waterfall payments environment will offer an engaged consumer who may not qualify for point-of-sale (POS) credit other options, namely LTO, ideally keeping them engaged until they find a financing option that works for themselves and the retailer.
Recounting his conversations with Affirm, Werner said, “I spoke to Affirm and said, ‘You’re missing out on a good opportunity. If the customer isn’t right for you, let me make the customer happy because in the future they might be right for you, just right now.’”
After some configuring, Nature’s Sleep launched its waterfall financing option.
“It’s been fantastic,” Werner said. “Everyone’s happy. I know Orlando is super-happy. We’re happy, Affirm’s happy, and the customer’s happy. We just want to make it easy for our customer to do business with us no matter which option they want.”
LTO differs significantly from rent to own, in that shoppers get to select the actual products they want — and not other brands, or even used merchandise that’s often rented again and again.
“I don’t think anybody wants a used refrigerator or mattress,” Zayas said. “[LTO] gives them a choice. We’re able to treat that customer the same way as a prime customer, they have the same buying ability to use high-quality merchants like GhostBed and others, and they can get the high-quality items that they desire.”
Asked why more durable goods and big-ticket retailers don’t yet offer LTO financing, Werner said, “It is more expensive, but what most of the merchants don’t realize is that there’s such a large audience.”
He recited a litany of use cases, from affluent people from foreign countries who don’t have established credit in the U.S. to the “huge cash economy” of service providers who “might make a $150,000 … but don’t have it properly taxed through the system, and so they don’t really have [a credit file]. That’s just the world they live in.”
Zayas added: “Our mission is always trying to get the customer to ownership as quickly as possible, so we give them options to get to ownership. What we’ve found is the faster they get to ownership, the faster they come back. And our repeat rate is pretty phenomenal.”
Getting the Word Out
Werner said that Nature’s Sleep and GhostBed sales were up 500% last year and are currently running 50% to 60% ahead of that in 2021. Webster asked about drivers of this mattress mania.
Pointing to “a wider acceptance of online purchases of durable goods” he said that “all the different payment options [are] definitely important.”
Zayas added that “the acceptance of financing options and multiple financing options is starting to explode. Obviously, the BNPL splits and pay-in-four options … out there are driving consumer behavior to that, [and LTO] is driving consumers to that [option].”
It’s the financing waterfall in action. Both executives agreed that once a consumer engages, stepping them along easily until they hit on the right credit product for their situation is crucial.
For his part, Zayas is talking with other retailers — both online and offline — about how to expand LTO’s horizons.
“It really is about getting out there,” he said. “There’s a lot of retailers that are not familiar with [LTO], don’t understand it, don’t understand the ease.”
But the digital shift is changing this.
Zayas said: “I get teased because … there’s a daily package from Amazon landing on my doorstep. That’s going continue because it’s easy, it’s convenient — and now that you have payment options, you open up that door to people who probably wouldn’t have been able to [qualify for financing] before now to have those options to do that online.”
Read also: The Paycheck-to-Paycheck Report