Join the lay-by rev­o­lu­tion

The new de­ferred pay­ment ser­vices can ben­e­fit both re­tailer and shop­per

Money Magazine Australia - - ANTHONY O’BRIEN SMALL BUSINESS - An­thony O’Brien An­thony O’Brien is a small busi­ness and per­sonal fi­nance writer with 20-plus years’ ex­pe­ri­ence in the com­mu­ni­ca­tion in­dus­try.

As house­holds gear up for the peak spend­ing sea­son, re­tail­ers will be jostling to cap­ture ev­ery dol­lar. But this year eye-catch­ing dis­plays and dis­count stick­ers may not be enough to tempt con­sumers to buy from your store.

A grow­ing num­ber of Aus­tralians are em­brac­ing dig­i­tal “buy-now, pay-later” op­tions such as After­pay, PayItLater, Open­pay and zipPay, and it’s worth con­sid­er­ing whether your busi­ness should join the trend.

De­ferred pay­ment op­tions are a form of de facto lay-by with a twist. The pur­chase is paid off grad­u­ally. How­ever, un­like tra­di­tional lay-by, the cus­tomer takes the goods home im­me­di­ately – there’s no need to wait un­til the pur­chase is fully paid off. And in­stead of the mer­chant re­ceiv­ing the pay­ment di­rectly, the cus­tomer makes pay­ment to the de­ferred pay­ment ser­vice.

For the re­tailer this model brings pluses and down­sides. On the up­side, the re­tailer re­ceives rev­enue al­most im­me­di­ately (cer­tainly far sooner than with reg­u­lar lay-by) and credit risk, in­clud­ing the pos­si­bil­ity of card fraud, is passed to the dig­i­tal pay­ment provider. Un­like tra­di­tional lay-by, there are no costs as­so­ci­ated with hav­ing to con­tact cus­tomers to chase up out­stand­ing pay­ments, and as the goods go home with the con­sumer im­me­di­ately the re­tailer doesn’t have to wear stor­age costs.

The com­pa­nies be­hind these buynow, pay-later ser­vices also point to the po­ten­tial for a higher spend per cus­tomer and in­creased re­peat busi­ness. How­ever, whether this oc­curs for your out­let is a wait-and-see issue.

Cost of con­ve­nience

Of course, this con­ve­nience comes at a cost. From the cus­tomer’s per­spec­tive, there are no up­front fees and no in­ter­est charges as­so­ci­ated with de­ferred pay­ment op­tions, though late pay­ment fees ap­ply. Pur­chases are re­quired to be paid off grad­u­ally by way of reg­u­lar in­stal­ments, and in the case of After­pay late pay­ments in­cur a $10 late fee, fol­lowed by a fur­ther $7 fee if a pay­ment re­mains out­stand­ing seven days later. zipPay cus­tomers need to make a min­i­mum re­pay­ment of at least $40 a month and a $5 monthly fee ap­plies if there is an out­stand­ing balance.

These late fees are not the main game for de­ferred pay­ment providers. As a guide, late fees ac­counted for just 20% of After­pay’s rev­enue for the 2016-17 fi­nan­cial year. It is fees paid by re­tail­ers that are the chief bread­win­ner.

Ex­actly what re­tail­ers pay to tap into de­ferred pay­ment ser­vices varies be­tween providers, though the struc­tures are broadly sim­i­lar. Mer­chants typ­i­cally charge a flat fee of about 15¢-30¢ per trans­ac­tion plus a com­mis­sion of around 2%-6% per pur­chase. Mer­chant rev­enue is paid net of these fees.

When it comes to choos­ing be­tween providers, the cost may not al­ways be the de­cid­ing fac­tor. It can come down to com­pat­i­bil­ity with your e-com­merce and point-of-sale (POS) plat­form. After­pay, for in­stance, is com­pat­i­ble with Ma­gento, Neto, Shopify, Is­land Pa­cific, In­fin­ity, Fu­tu­ra4Re­tail and Com­merce Vi­sion. PayItLater, on the other hand, in­te­grates with WooCom­merce, Shopify and OpenCart.

It usu­ally costs noth­ing to bring de­ferred pay­ment op­tions on board and there are gen­er­ally no com­mit­ment fees. None­the­less, re­tail­ers need to con­sider whether cus­tomers would have made the pur­chase any­way, es­pe­cially as pay­ments need to be linked to an ex­ist­ing debit or credit card.

With­out ex­ten­sive credit checks or in­ter­est rev­enue, it stands to rea­son that these providers im­pose spend­ing lim­its on the cus­tomer, par­tic­u­larly at the out­set of the re­la­tion­ship. After­pay al­lows re­tail­ers to set a dol­lar limit per trans­ac­tion capped at a max­i­mum of $1500. If this is be­low your out­let’s av­er­age pur­chase, a de­ferred pay­ment method may not be ap­pro­pri­ate.

One thing is cer­tain: the days of tra­di­tional lay-by look num­bered. For small busi­ness own­ers who have re­luc­tantly had to re­turn un­claimed (and only partly paid for) lay-by items back to the shelf, of­ten at dis­counted prices, that may not be such a bad thing.

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