While the UK has narrowly avoided a recession, this period of low growth and high interest rates is still expected to last long.
In times like this, shoppers seek ways to save money and tighten their budgets. However, there remains a need to make significant purchases, especially high-ticket items.
This is where fintech has an opportunity and a responsibility to support both their clients – the merchants and the lenders – and the end-users, the consumers.
Declining consumer spending
ONS October retail statistics reveal UK retail sales are below their pre-pandemic level.
These figures are worrying when we consider the pressures consumers and retailers face. With a freeze on income tax thresholds, council tax increases and the relief for energy bills not keeping pace with the energy price guarantee rise, many will simply cut spending to combat the rising cost of living.
Statistica predicts that disposable income per capita in the UK will fall by 4.3% in the 2022/23 fiscal year. This shift is the most significant drop in living standards since 1956. Furthermore, ONS found that 57% of consumers spend less on non-essential items, and 16 million people have even cut back on food and other essential items.
Declining disposable income shows consumers are curbing their spending, but the need to purchase essentials remains, ranging from the weekly food shop to a new boiler.
Cutbacks for items like this can be unavoidable, and therefore, fintechs should provide additional support to help consumers manage to pay for things. Checkout finance is one such measure that can support consumers by allowing them to pay for items in instalments without interrupting retailers’ cash flow.
How can checkout finance support?
Checkout finance refers to offering financing options at a merchant’s checkout. This is often confused with Buy Now, Pay Later (BNPL), which is growing in popularity with consumers. However, BNPL can have its limitations, especially when purchasing high-ticket items. For example, such services often have borrowing limits, and payment instalments are usually limited to 3-4 months which can still be costly.
Checkout finance provides higher-value loans with repayment periods extending to several years. This also gives greater flexibility to the lender and merchant, who can offer interest-bearing loans to offset the increased risk of providing long-term finance.
At Divido, we found more people used checkout finance during 2022’s Black Friday weekend than the previous year. We saw a 50% increase in the number of credit activations, with the sum of activated credit 23% higher than in 2021.
This data shows that, despite economic uncertainty, shoppers were still inclined to make significant purchases and were happy to choose financing options to help them do this.
Buy Now, Pay Later is set to struggle this year. Many of the most well-known BNPL brands rely on borrowed cash to fund their loans, which puts them at the mercy of increased interest rates. 0% interest loans will become harder and harder to sustain.
Additionally, new regulations arriving in 2023 will put additional pressure on the processes of BNPL companies, for instance, by mandating new rules around credit checking and credit reporting. Checkout finance, on the other hand, is provided by established lenders who lend from their own balance sheets and is already highly regulated.
Merchants must adapt their solutions to a changing market
Retailers will look for more sustainable and responsible solutions for consumers to pay in instalments without borrowing beyond their means. This is where checkout finance can support. By working with financial institutions to offer regulated checkout finance, retailers can offer their customers a payment model they are actively seeking while also shielding themselves from the BNPL bubble potentially bursting.
While it can be tempting to offer quick-fix solutions, customers will remember how brands recognised their concerns and the steps they took to address them during this cost-of-living crisis. At a time when consumers are feeling the pinch, retailers who acknowledge their customers need support with payments and who partner with providers that offer more consumer protections could see an increase in customer loyalty.
By associating themselves with responsible lenders, retailers can gain custom and build long-term trust with consumers to increase customer lifetime value (CLV) long after this economic downturn ends.
As economic uncertainty continues, many people will wonder how to navigate payments for costly items. Financing options like checkout finance can provide relief, offering manageable instalments for repayment. BNPL is not a viable option, nor the most sustainable and responsible. We expect to see increased financial institutions offering checkout finance to meet consumer demand and support the cost-of-living crisis.
About the Author: Todd Latham is the CEO of Divido.