We are entering a period of some significant financial uncertainty. While the stock markets and the economy continue their upward momentum, at the same time there are signs of nervousness about the underpinnings of our country’s infrastructure, financial systems, and the ability of future generations to create and consolidate wealth as past generations did. In this environment, retailers must make everyday decisions that may make or break their businesses – decisions about inventory levels to keep, prices to charge, and credit to offer their customers. This is nerve-wracking stuff. It has to be right.
That last item, how much credit to offer and how to offer it, has become one of the key levers of financial success in the retail trades. There is hard evidence that having the right credit partners and offering the right credit programs can add 50% to the number of transactions and 33% to the amount a consumer will buy.
How did we get here? And what can a retailer do to deploy credit in the right way? That is the focus of this new series, Giving Credit. The pun is obvious – it is all about credit, but also about giving credit to the innovators and those that have found ways to improve the buying power of consumers.
Retail credit is changing, fast. Incumbents are retrenching and innovators are everywhere. Technology-centered solutions are changing how consumers apply for and use credit, and the regulators are working hard to keep up. How did we get to the place we are now? The history of retail credit is marked by long periods of stability interrupted by moments of severe turbulence and innovation. Selling on credit has been an option for retailers as long as people have traded goods and service, but modern credit offerings got their start with the advent of in-store credit programs in the early 1900s. Thereafter the consumer financial universe was relatively unchanged until the major credit cards were introduced in the 1950s, and remained stable again until white-label credit products appeared two decades after that. Against that background, the pace of change in credit markets during the past decade, and the scale of the turbulence that will continue until a new stable market structure is found, is unprecedented.
Overall, we perceive a significant shift in power in the merchant–lender relationship. We see retailers gaining ever-greater leverage over their financing provider, or increasingly providers. New competition, new technologies, new sources of funds, and new regulatory activism are all driving this change. This is good news for retailers: no longer will lenders be able to dictate the terms, discounts, and fees, without pushback from merchants.
In order to harness the opportunities offered by this new environment, retailers will need to change their habits too. Retailers will benefit only if they put in place the systems and processes to allow them to move from one lender to a portfolio of lenders, and change out lenders that do not meet the needs of the merchant’s particular market environment or who’s practices drift from what is expected.
Next time: Technical disruption in retail credit.
- Fred Knops, CEO