The Changing Face of Consumer Finance

By Robert Schuijff, CEO, etika

Living in a post-pandemic world, a lot of consumer behaviours have changed and in some respects, people are reluctant to return to the status quo. This also applies to the world of lending and payments. Technology has disrupted the financial market and made way for new, more flexible financing solutions which reflect “the new normal”.

Micropayment solutions have become particularly popular with players from fintechs to traditional banks moving into the space. The first iteration of Buy Now, Pay Later (BNPL) via third-party lenders, has already given way to a second version that is claimed to rival spending on credit cards. For instance, a US study from C+R Research found that shoppers apply for short-term loans for 35% of all their online purchases from BNPL providers.

The new consumer finance ecosystem is changing the way we view spending. However, not all spending is equal. The damage credit rejection can have is more prominent than we think. A YouGov study, commissioned by etika, found that a credit application decline can significantly impact customers’ mental health, credit score, and future relationships with retailers.

So how can we navigate a landscape that is rapidly evolving while keeping consumer wants and needs at the forefront of operations?

What’s driving the evolution of consumer finance ecosystem

A major driver of the evolution of consumer lending is the e-commerce boom brought on by the pandemic.

Users turned to online shopping both out of necessity and for entertainment purposes. The convenience of online shopping appealed to many and the number of online purchases continues to grow despite shops reopening. According to Shopify, two years ago 17.8% of sales were from online purchases. This number is expected to reach 21% in 2022 which represents a doubling in the ecommerce market share over two years. In response, smaller and more competitive finance providers and fintechs have entered the consumer finance ecosystem to service changing demands and behaviours of consumers.

Another side effect of the pandemic has been the cashflow pressure felt by consumers. Many are experiencing difficulties balancing their incomes and outgoings, when faced with the need to purchase large ticket items. To them, the ability to access credit is a lifeline. As the consumer finance matures, future shoppers have a growing variety of BNPL options and other long-term finance providers to choose from. This begs the question of whether customers know exactly what they’re getting and whether or not these solutions fit their financial needs.

The impact on consumers and the need for ethical finance

With consumer finance products evolving at a very quick pace, it is important that consumer well being remains a forethought in product offerings. New technologies can be utilised in a way to make financing solutions more accessible and fairer to consumers.

Let’s look at credit declines as an example. The application process is binary, and declined applications can have significant impacts on consumer happiness, as noted in a recent YouGov study of over 2,000 UK adults. 54% of respondents would feel upset or very upset if rejected for credit by an online retailer and 8% said it would affect their mental health.

Evidence also shows that credit declines would negatively impact a consumer’s relationship with a retailer. 37% of respondents would change their attitude towards a retailer if rejected for credit and a further 23% of respondents would not go back to that retailer at all if their finance application was rejected.

This is where it becomes critical for new consumer lending solutions that offer alternatives to traditional financial services, to take consumer well being into consideration. The concept of ethical finance is rapidly gaining traction and this means more and more companies offer financing that considers environmental, social and governance factors that affect borrowers.

What needs to change

Long-term loans for high ticket items are often harder to obtain. Consumers often gravitate towards financing options for household necessities, such as washing machines and fridges.

In the short-term loan market, technologies have emerged to make the finance application process easier and quicker. However, the vetting process and regulation is less stringent. On one hand, this is positive as financing is made more accessible while on the other hand, there is often not enough thought given to the financial wellbeing of consumers who may struggle to make repayments on time and face late fees.

That is why ethical financing is becoming more and more important. The power of technology can be utilised to meet new consumer demands in a way that prioritises their financial wellbeing. For example, businesses can run ‘soft’ credit checks on consumers without hurting their credit scores. At etika, we offer alternative finance solutions to consumers looking to buy big ticket items such as furniture or white goods based on what they can feasibly afford without breaking the bank. In fact, 92% of etika customers sampled had an improved credit score after utilising etika’s finance that fits!

Additionally, when retailers tell customers what they can afford and offer finance accordingly, the number of declined customers drastically reduces. Secondly, the improved customer journey reduces drop-off and therefore increases sales conversion. The result is a more ethical approach to consumer finance.

The future of consumer financing is ethical. Consumers should be central to the consumer financing ecosystem and companies now have the ability to make this possible through technology. The next phase of consumer finance will be about making sure consumers have access to finance that fits their needs and they ultimately can afford.

This is especially important today when inflation is rising and economic uncertainty continues. People turn to micropayments and consumer loans to cover the costs of higher ticket items they may not otherwise be able to afford outright. Credit should be provisioned in a way that does not harm the consumer whether it be their financial wellbeing or emotional health.