Labor Day has come and gone, and the holiday season is just around the corner.
But current economic and financial conditions are forcing consumers to face some tough choices about buying what they want, while having the means to fund it.
That’s why PYMNTS CEO Karen Webster sat down with Versatile Credit CEO Ed O’Donnell, Genesis Financial Solutions CEO Bruce Weinstein and Upbound Group, Inc. CEO Mitch Fadel to unpack some of the misperceptions around incorporating secondary and tertiary financing options in retail settings, as well as to dig into the benefits that offering a more nuanced financing program can bring to both retailers and consumers.
Over 106 million households, around a third of the U.S. population, have subprime and below credit scores, and a large portion of these have limited or no credit profiles whatsoever.
This could leave many consumers hung out to dry as access to credit increasingly tightens while macro pressures eat even further away at purchasing power.
“The economy is almost never hot at the subprime consumer level. I think the consumer’s really struggling there. Things usually hit them first, and credit is tightening up at the lower prime level and the near prime level as well,” Fadel said.
And roughly 21% of all U.S. consumers report needing their next paycheck to meet their monthly financial obligations.
“The banks are under tremendous pressure these days, both for optical reasons, but also regulatory reasons, to ensure the safety and soundness of their bank, and that means tighter underwriting,” added Weinstein. “You have to cut from the bottom in a more challenged credit environment.”
That’s bad news for the second look and tertiary consumer, or those with FICO scores below 700 and 600 respectively. But it also represents an opportunity area for savvy merchants.
“Credit has never been more important for merchants than during any other [economic] period,” said O’Donnell.
Data shows merchants are missing out on as much as a 29% uplift when failing to include secondary and tertiary providers among their financing options and credit portfolios.
So why aren’t they integrating these value-add options?
“Second-look solutions [and beyond] are perceived to be expensive to the retailer,” said Weinstein. “Retailers [are] used to paying almost nothing for their primary program because there’s very little credit risk there.”
“Merchants have gotten trained over the years to just think about approval rates from a primary bank perspective,” said O’Donnell. “But in an economic cycle such as the one we’re in today … that overlap of having the relationship with a good secondary provider and a good solid tertiary provider is critical because if you have just a singular relationship, you’re absolutely going to lose sales when customers walk because there is no credit available.”
And secondary and tertiary financing options can increasingly play a vital role in the consumer path to purchase. With economic conditions fluctuating, many consumers don’t have the funds to pay for the necessities much less discretionary items — and a silent but growing number lack the prime credit score to access traditional financing options.
“We see higher repeat purchase rates in second look options than within prime programs,” noted Weinstein. “People really appreciate that access to credit, and it helps drive people back into those stores.”
“When we see people actually take the leap of faith and deploy a comprehensive program, they’re kicking themselves afterward that they haven’t established these relationships or used them in the right manner previously,” O’Donnell said.
“There is a huge subprime market out there, and it is always there,” added Fadel. “But a lot of retailers don’t think that customer is in their store … you don’t know what you’re missing until you add it in.”
With the capability to provide diverse choices and stay competitive in the market, retailers and lenders alike can drive business, grow sales, and provide a stellar customer experience.
“When you’ve got a full deployment of strong credit products, then you’re giving your consumers the most amount of choice,” said O’Donnell. “The same way retailers want to provide a variety of products for their customers, the same holds true when you’re talking about financing.”
“This is just-in-time financing. The consumer has either made the commitment to shop or made the commitment to buy, and now they need a tool. And these lenders step forward and say, based on your information, we would love to have you as a customer. Here’s a credit vehicle that will get today’s purchase done and hopefully extend the relationship,” said O’Donnell.
“What serves as even additional proof in the pudding besides the percentage lift for retailers is that once they put in second look and tertiary financing options, nobody ever changes their mind and gets rid of it,” Fadel said.
That’s why it is crucial for retailers to challenge the misconceptions surrounding credit options and embrace the potential they hold.
By understanding the fluidity of credit situations, considering economic factors, and addressing implementation obstacles, retailers can unlock new avenues for growth and provide a seamless shopping experience for all customers, regardless of their credit standing.
As for the merchant categories best suited to diverse credit options?
“Elective medical and specific dental has become a big, greenfield opportunity on Versatile Credit’s, platform as well as home improvement. I think travel is the place that we’d love to go to at some point,” said O’Donnell.
“For us, probably the biggest growth segment for us has been in wheel and tire,” Fadel said. “We’ve been in the furniture industry for a long time, as well as jewelry, appliances, and electronics, but people are really starting to recognize the necessity of more options in the wheel and tire space.”
“Furniture and jewelry have been very good at thinking about financing alternatives for a really long time,” said Weinstein, “but now we are looking at the verticals where we haven’t spent the last decade trying to penetrate. And there does seem to be a high degree of interest in the marketplace.”
“We’re trying to move to the market to a unified experience where the consumer is able to make their desired purchase knowing that there is a financing solution available for nearly everyone,” said O’Donnell.
And that’s why the future of financing looks promising, offering a valuable lifeline to consumers and a competitive edge for retailers in an increasingly dynamic market.
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