Retail financing is an appealing incentive for merchants and consumers alike. One type of financing, waterfall lending, makes it possible for retailers to approve a higher number of transactions, resulting in happier customers and increased sales. With the holiday shopping season officially upon us and the economic impact of the ongoing pandemic still apparent, alternative financing options are more crucial than ever.
To further discuss the value of waterfall lending options at the point of sale, PaymentsJournal sat down with Mitch Ferro, CEO of Mastercard Vyze, and Ted Iacobuzio, VP and Managing Director of Research at Mercator Advisory Group.
Consumers want retail financing options
Simply defined, Retail financing allows a consumer to make a purchase with alternative lines of credit which exist outside of traditional credit cards.
Consumers are increasingly demanding alternative forms of financing, which is particularly true this year given that COVID-19 has put a strain on many household budgets. “A consumer financing strategy for merchants is a must in this environment,” explained Iacobuzio. “They have to be able to offer consumers what they’re looking for at the point of sale.” Waterfall lending is one of the most promising forms of alternative retail financing because it offers a variety of lending products to consumers.
An overview of waterfall lending
Waterfall lending enables retailers to use a network of lenders to offer financing to their consumers, as opposed to relying on a single lender. Much like a waterfall, the loan application cascades from one lender to another to identify the best option for a given customer’s needs.
For example, visualize a scenario of 1,000 loan applications cascading through a waterfall of three lenders. The first lender approves 50% of the transactions, with the remaining 500 trickling to the second lender. That lender approves 25% of the transactions that were rejected by the first lender, cinching the retailer another 125 approvals. The 375 remaining applicants trickle to the third lender in the chain, which approves 70% of them (263 approvals).
If the retailer only worked with the first lender, they would have 500 approvals out of 1,000 (50%). Since they had the network of three lenders, however, they were able to approve 888 transactions (89%), which are attached to a ticket price. The increased approval rate translates to higher revenue for the retailer and more satisfied customers.
Waterfall lending helps consumers and merchants alike
Financing increases purchasing power at the point of sale by allowing consumers to purchase what they need when they need it. “But it’s not just about that increased purchasing power,” noted Ferro. “It’s about making sure that the consumer can pay and finance in the way that they want to.”
This choice, flexibility, and higher approvals are all factors that make alternative financing beneficial for customers. On the merchant side, retailers that offer customers these new lending options can drive additional sales and an improved customer experience that fosters consumer loyalty. A better customer experience, wide customer base, and increase in loan approval rates ultimately lead to more sales and higher revenue.
A recent white paper created in collaboration by Mercator Advisory Group and Mastercard Vyze offered additional insight into the value of alternative financing and waterfall lending. The following are some of the key takeaways of the paper:
- Merchants have options. Historically, merchants have contracted with a single lender to provide financing for customers. With waterfall lending, this no longer has to be the case. “One of the benefits of waterfall lending is this ability for [merchants] to not be locked into one set of underwriting criteria or one financial product,” said Ferro.
- The customer experience is crucial to drive merchant loyalty. Alternative financing, implemented well, provides customers with an improved experience that drives loyalty to the retailer offering it.
- If alternative financing is done right, merchants reap the rewards. A well-engineered waterfall lending process helps retailers close more loans and assist more customers. More approvals minimizes revenue loss caused by credit declines.
Alternative lending is valuable for holiday shopping
With holiday shopping in full swing, now is a great time for merchants looking to capitalize on the season to consider a new retail financing strategy. Customers are looking to make holiday purchases, but have a heightened need for alternative financing that meets their budgeting needs.
“Waterfall financing is not just for the holidays, but there are some special considerations for the this time of year,” remarked Ferro. “One of those key considerations is that you have motivated consumers who are looking to buy the things they need for the holidays, but they’re also looking at balancing the need to budget.”
How should merchants approach choosing a retail financing strategy?
Retail financing isn’t a one-size-fits-all approach. Merchants interested in enhancing their consumer lending strategy or adopting a waterfall lending approach should take the time to evaluate their options while being precise about the unique longer-term requirements of their business.
This includes taking into consideration factors like target consumer demographics, which can help merchants determine the financing solution that works best for them. Another important factor in choosing a financing solution is brand equity. This means asking questions about how important repeat purchases and consumer loyalty are to the business.
Ferro concluded by encouraging merchants navigating this decision-making process to reach out to Mastercard for assistance. “We’re not a lender ourselves, but…we have a broad view of the marketplace and can help them in terms of navigating what solution is right for them, what types of financing they might want to offer, and how to deploy that.”