Our current economic landscape is highly uncertain and both consumers and retailers are faced with unprecedented challenges. The ripple effects of the pandemic and the cost of living crisis have impacted the cost and supply of basic goods, for individuals and businesses.

Consumers are struggling with rising prices and interest rates, and with the energy price cap increase, further pressure has been added onto their disposable incomes.

Consequently, as confidence hits record lows and consumers tighten their budgets, retailers, particularly those selling big-ticket items, risk big drops in sales in Q4 and beyond. In the past, we have seen that high-end retailers are amongst the hardest hit during times of global economic downturn. According to Bain and Co, the 2008 financial crisis wiped out 9% of the luxury goods market and high-end department stores saw sales fall by 25% in 2009. Despite overall retail sales volumes rising by a meagre 0.3% in July of 2022, the latest ONS figures show that sale volumes of household goods stores fell by 0.4% this month, mainly driven by falls in furniture and lighting store sales.

The consequence of these rising costs will have a large impact on retailers of high-value items and it should be an area of concern to the sector. But what can they do to minimise drops in sales, and show their support to customers through this tumultuous time? 

The emergence of consumer finance

Let’s take a brief step backwards. The pandemic accelerated a shift towards consumer finance and gave rise to the proliferation of BNPL products. Masses of consumers turned to online shopping rapidly, and in response retailers invested in their e-commerce experience to create a seamless checkout process. This resulted in many retailers offering their customers zero to low interest finance or BNPL products as a way to increase conversion rates. Meanwhile, over the years BNPL has grown from a niche payment option to a viable, mainstream consumer finance alternative for a generation of young customers. Growth that has been exacerbated by the recent proliferation of e-commerce activity.

Looking at the statistics, it is clear that the growth of the e-commerce market and BNPL usage are closely aligned. E-commerce rocketed nearly fivefold when comparing 2020 growth rates to the average growth rate seen from 2015- 2019. The BNPL market reported a CAGR of more than 85% from 2019 to 2021.

The mass migration to online shopping was a lifeline for many but in this new climate, with all of its economic challenges, retailers will have to reconsider how to maintain conversion rates while catering to the needs of today’s buyers. UK retailers of high-ticket items have to be particularly careful in the financing options they offer to make sure their customers’ financial well-being is brought to the forefront at a time when the cost of living is rising each month.

What can retailers do to navigate the current climate?

Navigating a landscape that is evolving at pace while keeping consumer wants and needs at the forefront of operations is not a task for the faint-hearted. As inflation continues and the economy remains uncertain, more will seek consumer finance to secure the items they love and need. Done in the right way, this should not harm consumer credit or well-being. However, a core part of striking this balance is ensuring that retailers and financiers can walk the tightrope between enabling purchases and means testing for affordability. It will be important for retailers to be aware of best practices when it comes to offering financing options, in order to show support to customers.

Partnering with regulated providers for example, allows shoppers to be confident in their buying decisions with the knowledge that their financing solutions are protected within a regulatory framework. Retailers can rest assured that their customers’ experience remains frictionless through their finance offering.

Transparency is also an important aspect of consumer finance. Finance must be affordable, so being upfront about fees or any potential costs that could be overlooked is crucial. The right provider will ensure that there are fair finance options to support the needs of the customer. The retailer will need to ensure all additional costs are communicated in a clear and concise way.

Lastly, retailers who can offer more personalised solutions to finance will stay ahead of the competition.

The aim is always to give the customers the products they want, with finance they can afford and this will be different for every individual. Providing an experience that involves better processing and vetting of customer information will support consumers in the best way possible, leading to a more positive interaction and enhanced customer satisfaction.

However, it isn’t all plain sailing for retailers. A BNPL solution can cost merchants a fee on top of credit card processing fees which is worth considering. As is the need to offer more than one finance option for consumers who may have a preference for certain providers at checkout. Moreover, retailers also need to consider the cost of integrating finance technology into existing platforms. While consumer finance is fast becoming a payment necessity, retailers should not overlook the costs that are associated with these growing checkout opportunities amidst minimised spending. 

As traditional banks clamber to join the digital finance provider queue, there is no doubt that with increased regulation and more responsible lending practices, consumer finance has potential to become the de facto choice for buyers and retailers. Establishing partnerships with reliable partners that can tailor financing solutions to customer needs and budgets will help retailers minimise the consequences of a potential economic downturn.