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Feb 8, 2023
Consulting

Leveraging Retail Financing for Consumer Debt Relief During Global Recessions 

Global recessions are a period of global economic downturn or negative economic growth. They result from economic triggers (such as a rise in oil prices), financial shocks (such as the one that set off the Great Recession), asset bubbles, substantial changes in economic demands, or a combination of all. Most companies fall during a recession fundamentally because of a decline in revenue (and demand) and uncertainty regarding future increases. However, studies indicate that there are several ways to alleviate the damage.   

A 2010 study titled “Roaring Out of Recession” found that during the global recessions of 1980, 1990, and 2000, 9% of companies didn’t just recover in the first three years following the economic downfall – they managed to thrive, surpassing competitors by nearly 10% in sales and revenue growth.   

A recent study by a global management consulting firm Bain & Company using data from the Great Recession, came to the findings. Another study by McKinsey & Company found similar results. The top 10% of companies in Bain & Company’s analysis witnessed steady revenue growth throughout the period and continued to flourish.  

So, how did those companies survive during and after the recession? The game-changer was preparation.   

The Bain report suggested that companies that made contingency plans or followed different strategies stagnated in the aftermath of the economic downfall. They turned to survival mode when the recession hit, relied on cost-cutting, and responded defensively. Companies that struggle to thrive through a recession are slower to recover and seldom catch up.   

Decentralized companies are better able to thrive in shifting economic conditions. 

Understanding the Impact of a Recession on Consumer Debt  

The economic downturn caused by a recession can significantly impact consumer debt. During economic uncertainty, consumers may be more likely to take on additional debt to maintain their lifestyle or make ends meet.  

This can lead to increased consumer debt, which can have long-term consequences for individuals and households. It can also affect businesses as they may struggle to recover from the recession due to decreased consumer spending.   

According to the Federal Reserve’s latest report on consumer credit released in April 2022, consumer debt increased by $35 billion to a whopping $4.57 trillion, with the overall consumer debt rising at a seasonally adjusted CAGR of 9.7%.   

Credit card debt – which contributed nearly a quarter of all consumer debt – increased by 21.4% in the first quarter of 2022. This rise can be attributed to inflation, with consumers maintaining their retail spending at high levels by lending more.  

In March 2022, the New York Federal Reserve indicated that household debt stood at $15.8 trillion in the first quarter, up by $266 billion or 1.7% from the last quarter of 2021. According to the report, home and auto loans triggered the spike, climbing by $250 billion for home loans and $11 billion for auto loans.   

Caleb Silver, Editor-in-Chief of Investopedia, said:   

The rise in consumer debt levels as the economy slows and interest rates rise could lead to a hard pullback in consumer spending. Since consumer spending accounts for 70% of US GDP, any pullback could tip the economy into a recession.”  

These figures suggest why it’s important for consumers to understand the potential implications of taking on more debt during a recession and its associated risks. 

How Businesses Can Take Advantage of This Situation 

2022 has been an expensive year: The cost of living is increasing compared to household incomes, forcing individuals to rely more on consumer debt to make ends meet. Additionally, the rising interest rates because of inflation is making debt all the more expensive.   

While the possibility of a global recession has left people worldwide skeptical about their financial status, most experts agree that the key to preparing for an economic downfall is clearing as much debt as possible.   

Paying down consumer debt is an important thing to do, but when a recession hits, doing so holds greater power than you might imagine.  

Consumers are doing what they can to fight the rising expenditures. According to a study, approximately 4 in 5 (79%) Americans say that they have taken measures to combat inflation over the last six months. 42% of individuals say they’ve avoided driving to nearby places, and 39% say they’ve bought unprocessed food. Nearly 19% of Americans say they’ve cleared as much debt as possible in response to inflation over the given period.   

Although keeping your spending habits in check and adding extra funds to savings or debt repayments can be a significant measure, these are temporary fixes. This is where retail financing comes into the picture. 

What is Retail Financing? 

Retail financing is a loaning scheme or the offering of credit facilities to eligible, creditworthy customers. 

It offers customers payment installments or credit facilities to make a purchase. It’s a win-win situation – consumers get to spread out the purchase’s cost over time, and businesses benefit from increased sales.   

Retail finance offers flexibility, affordability, and more options when customers reach the checkout. Whether shopping online or in-store, it helps pay for life’s essentials and gives people a better way to manage their money.  

Retail finance is usually more affordable than using a credit card and comes with interest-free deals and easy, flexible payment terms. Offering financing to customers not only helps them leverage buy now and pay later (BNPL), but it can also keep traffic and footfall moving on your website and in-store.  

Flexible payment options can increase conversions, increase sales, reduce basket abandonment, and give your brand a competitive edge. Understanding your customer’s needs and making the process seamless leads to a spike in sales, nurtures relationships, and builds loyalty for continued growth. 

How Retail Financing Can Help Customers and Businesses During a Recession 

With retail finance, the loan provider and consumer take care of the loan repayment, saving retailers the trouble of collecting it.   

Plus, there are plenty of benefits that come with retail financing:  

  • Decreased cart abandonment  
  • Increased product purchases/sales  
  • Enhanced customer retention  
  • Boosted customer loyalty 

During the 2008 Great Recession, businesses that invested in digital infrastructure were the ones that succeeded. Nancy McKinstry, CEO of Wolters Kluwer, urged companies to adopt similar plans to adjust to the ‘new normal.’   

The priority is to focus on digital transformation that affects your customers,” she said in a statement published in the Harvard Business Review.  

Moreover, retail financing is one of the winning strategies for businesses that focus on customer centricity. Rohit Deshpande, a Harvard Business School professor, pointed out that companies that emphasize customer-centric practices often gain market share during a downturn.   

He said, “It is even more critical for firms to become more customer-centric by researching and understanding their customers’ new problems caused by fear, isolation, physical distancing, and financial constraints, and attempt to structure their offerings to meet these new unmet wants and needs.” 

Minor adjustments tailored to customers’ needs can pay dividends in repeat business and customer loyalty. One example of this is offering flexible payments or retail financing options. When consumers can split a purchase into smaller payments over a set period, they perceive the total cost as more manageable, resulting in higher average order values.  

Affirm, a San Francisco-based FinTech company, mentioned that offering pay-over-time payment options has allowed customers to make comfortable payments and be happy with their purchases. It’s a great way to show customers that you care about their budget and provide them with a comfortable shopping experience.  

Affirm witnessed up to 85% higher average order values when consumers were provided with retail financing options.   

This means that strategies focused on affordability, customer centricity, and digital transformation can help companies combat this recession. 

Steps Necessary to Qualify for Retail Financing    

You need to keep a few steps in mind when exploring different types of retail financing to help you select the right option.  

Reputation: The lender’s reputation is likely the most critical factor you should consider when choosing a lender. You want to ensure you are working with a lender with a good reputation for being fair and honest.   

Repayment Terms: Before you sign the agreement, it is important to read the guidelines and understand the repayment terms. Having a clear understanding of how much you will be expected to pay back and when your payments are due is essential to stay caught up on your payments.   

Interest Rates: The interest rate on a loan is the amount you pay each month to the lender to receive financing. The interest rate is often negotiable, so shopping around and comparing rates is important to find the best option for your specific needs.   

Credit Scores: Before you move ahead, it is crucial to understand how a retail financing type impacts your credit score. Understanding the impact each type of financing will have on your credit score is essential to help you make an informed decision. 

Exploring Different Types of Retail Financing for Your Needs  

A retail finance loan is an excellent way to make big-ticket purchases more affordable for customers with a good credit rating. It’s a great way to encourage customers to shop with you and reap the rewards, and you can offer a range of different financing methods. Spreading out the cost of the purchase not only makes it easier to manage but also incentivizes customers to go ahead with their purchase.  

There’s a range of retail financing options available; each offers something different, so you can choose the one that best suits your unique circumstances. Let’s look at some of the primary methods:  

0% Finance  

The 0% finance option in retail financing spreads the cost of a product purchase out over a long period with no applicable interests. This method is a great, cost-effective way for consumers who do not have access to personal funds to buy products while also boosting sales without reducing product costs.  

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Bullet Loans  

A bullet loan is a financing option wherein the loan amount (including interest) is paid off in a single payment by the end of the loan period. This type of loan benefits customers who don’t have the funds but are confident they will have the money when the loan term is up. Additionally, this loan option is ideal for retail stores since it incentivizes customers to buy.   

Buy Now, Pay Later (BNPL)  

The ‘Buy Now, Pay Later’ (BNPL) option has gained immense popularity in recent years, especially among businesses. This method allows third-party lenders, such as banks and financial companies, to receive the total amount upfront. Subsequently, the customer pays off the loan in installments over time. This payment system has been proven to boost sales for businesses.  

This technology can still be quite beneficial during an economic downturn or global recession, making it possible for purchasers to keep buying even if their current financial situation is not the best.   

Recently, risks associated with this payment option, including fraud, have been making headlines. For this reason, if you are a business owner offering BNPL services, partner with a lender to receive the payment initially and then collect it from the buyers later. This guarantees that you are compensated even if there are difficulties in the future.   

Additionally, some people have expressed their concerns that BNPL may lead to financial issues for consumers. They should only use BNPL to purchase goods that will help them save money or increase efficiency. In this way, BNPL can be utilized as a tool to reduce wealth inequality, as it allows people without much wealth to invest in their futures.  

Finance with Applied Interest  

‘Finance with Applied Interest’ is one of the most common retail financing options offered to consumers over a predetermined period, with set monthly applicable interest rates.  

No matter the customer’s needs, retail financing helps make a purchase more manageable and encourages customers to purchase in the first place. Knowing these options exist and applying for them gives you the power to lift your financial condition during a crisis like a recession. 

What’s Next? 

Fintech is making our world more connected than ever.   

While this implies we can be negatively affected by crises such as economic contraction or a global recession, it also means that we are more prepared than ever before to support each other if we fall.  

The options mentioned in this article are all means of doing so, urging businesses to look after their financial conditions and consumers while creating greater access to financial services. 

About the Author

Premal Dave

Premal brings more than 17 years of experience in being a strategic partner & adviser to start-ups as well as Fortune 500 enterprises in digital transformation, concept to commercialization and full-stack engineering. He has fostered & managed executive relationships responsible for multi-year technology programs in Financial Services, Healthcare, Retail, Utilities, and beyond. He believes in transforming client relationships to long-term strategic partnerships through mutual trust, transparency & client first approach. He is passionate about technology, travel, motorsports, and above all, spending time with family. He graduated with a major in Marketing & Advanced Financial Management and holds a Diploma in Business Administration with a Management Development Certification Program from IIM-Ahmedabad in B2B Marketing.

Prior to joining TechBlocks, Premal has held strategic sales & business development positions at Automation Anywhere, InfoStretch among others.

Premal Dave