Retailers that offer credit can provide a lifeline to cash-strapped shoppers. But with the subsequent risk of increased bad debt, retailers and their finance partners are taking a much closer look at customers’ ability to afford such deals.
Figures from the Finance and Lending Association show that new retail store credit business declined 1 per cent in the year to August. Home shopping giant N Brown has already tightened its credit policy. Chief executive Alan White says: “So far, for us it has been a precautionary measure. It is all about recognising what is happening in the wider world. We took the view that the customer would have to demonstrate a payment history for longer before we gave them an increase in credit.”
Although an above average 39 per cent of applications were rejected in the first half of the year, White says it was not a result of stricter criteria. And while all customers who shop with N Brown have a credit account, 55 per cent clear their balance with each statement, he says. “We tend not to market the credit particularly hard,” says White.
Advantages of credit
Gerald Grimes, head of sales at the consumer finance division of Hitachi Capital – which supplies finance for retailers including DFS and Furniture Village – says retailers with finance options can actually thrive during harder times. “Retailers will use PoS [point of sale] to promote affordability and help bundle sales. If it is done properly it’s a good solution all round and does help to maintain sales in a slower environment.”
Furniture Village finance director Ed Duggan agrees: “Genuine interest-free credit is a real advantage to consumers and retailers, taking away some of the perceived obstacles to big-ticket purchases.”
Most retailers’ finance companies use a scorecard analysis of customers, coupled with credit checks, to assess their ability to repay. Experian provides tools that allow retail credit providers to determine whether the applicant is who they say they are and assess their credit commitments. Using existing bureau data, its Consumer Indebtedness Index also measures consumers’ debt levels without relying on detailed knowledge of their monthly disposable income.
Grimes says this is a key tool for Hitachi. “It’s a risk tool to measure and manage the customer’s ability to repay,” he says. Although application and therefore rejection levels are up a little, he says it is pretty much business as usual. “The dilution of acceptance levels has been marginal and acceptance levels have remained pretty constant,” he says. “Our policies have not changed. If you have a portfolio that is misbehaving then you will look to tighten up on areas that are causing pain, but we haven’t got that problem because we are a cautious lender,” he says.
Duggan says Furniture Village’s “demographic and the inherent quality of our book has ensured that our acceptance rates have stayed pretty static”. The retailer’s staff have been reminded of the benefits of credit, he adds. “We have talked with every sales consultant in the business, training and explaining the importance of a balance between subsidy IFC [interest free credit] costs and duration, compared with the benefit of higher order values and not losing a sale in difficult times,” he says.
Laser UK – which offers point-of-sale credit for retailers such as DFS and Anglia Home Furnishings, and store card credit offers for Adams and Ann Summers – also claims to have not yet changed policy, but admits it is keeping an open mind. “Our view is that the current economic climate is raising the need for extra vigilance,” says a spokeswoman. “We are closely monitoring signs that we may need to review our policies and are ready to act if we need to.”
The spokeswoman says Laser UK is trying to do more to enable customers to understand exactly what finance options are open to them. “We are very conscious of responsible lending. It doesn’t help us to lend to people who can’t afford to pay us back. We are also helping customers through the development of our products and making them more transparent,” she says.
Retailers and their lenders may be insisting it is pretty much business as usual, but further changes are inevitable – even if it is just tightening up operations. “This is a dynamic time for the global economy and our markets are in the midst of significant change,” says an Experian spokesman. “Retail credit is still flowing. However, this new environment will require clients to strengthen risk management and optimise collections activities across their organisation.”
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