Nov 20, 201810 min read

Instant Financing: Here’s What You Didn’t Know.

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by Jordan Dooley

As a concept, instant financing may seem intuitive, but all signs point to some misconceptions around how it works, why it’s different from traditional credit, and how this latest payment method is helping merchants change the checkout game.

Merchants today are faced with an overwhelming amount of information across the e-commerce payments ecosystem, and which solutions are best for their customer base. This lack of understanding means merchants are missing out on major opportunities to convert more customers and drive sales.

To help merchants better understand instant financing — while debunking some big time myths— we’ve put together a comprehensive view of what instant financing is, where the most value exists, and why it creates win-win scenarios for merchants and their customers.

Instant Financing 101: The Nitty-Gritty

The basics on instant finance boil down to three core features: speed, convenience, and choice. Instant financing allows consumers to quickly and easily apply for financing to pay for their purchase through an agreement established with the chosen financing partner. Unlike a traditional credit application, there are less details required from the consumer to process their application.

Merchants can offer instant financing as an alternative payment option that allows customers to pay a specific amount over an extended, defined period of time. After being accepted by a financing partner, that customer is then approved to shop with merchants who use that same solution. The result is shorter approval time, and an eliminated need for a customer to continually apply for credit. Customers can also use instant financing to buy more items as long as they fit within their approved amount.

For example, Klarna offers a Financing payment option that enables shoppers to pay for purchases over time – with a choice to do so in a few different ways depending on what works best for them. Customers know within seconds if they are approved and can quickly complete their purchase.

Customers have three choices when it comes to leveraging the payment option. The first is flexible month-to-month payments that come with no fixed term commitment. The second type of instant financing comes with the option to have planned payments. This provides the customer a promotional offer on eligible orders in order to purchase an item with a reduced APR. The third option involves a fixed APR, but any interest would be avoided if paid in full during a promotional period. Customers can choose what they want to pay each month, as long as they pay the minimum monthly payment.

Instant Financing: the Game-Changer

The biggest benefits of instant financing ties back into the core goals of any e-commerce merchant: driving more sales and increasing conversions.

Our research shows the leading factor in predicting online shopping cart abandonment is hesitation, a “fear” of purchase, which often increases at the payment stage. Whether it be over security fears, the final cost of the item is higher than expected, or the shopper just has pre-purchase buyer’s remorse, there are a number of “fear factors” that prevent a customer from finalizing a purchase. When merchants integrate an instant online payment process, the checkout process is streamlined. Instead of forcing a customer to think about payment at the end of the process, and make them enter lengthy payment credentials, instant financing can alleviate extra steps that increase the chance of cart abandonment. For example, Klarna’s process requires only 3 pieces of information for an approval decision.

Merchants today know they must offer diverse payment options to attract different types of shoppers. This means looking beyond traditional payment methods and customizing the shopping experience to fit the needs of shoppers who may be drawn to more innovative, flexible options.

For example, millennials tend to be debt-averse shoppers who aren’t keen on taking on additional credit card debt. This particular generation is more likely to have student debt and have learned lessons from the economic recession. As a result, millennials are less likely to want to buy large items that may increase their debt load. Instead of adding more credit card debt, instant financing gives consumers the ability to spread purchases out over time with flexible, transparent and low APR financing offers.

With the ability to quickly, and efficiently pay for an item using a flexible payment method, customers have the opportunity to pay on their terms: do they want to pay now, pay later or pay for an item over a period of time?

How Instant Financing Differs from Credit

Merchants should think of instant financing as a flexible alternative to credit. In terms of the payments ecosystem, it is a relatively new payment solution that puts consumers in control of how and when they want to pay a merchant.

Klarna partnered with Researchscape International to survey more than 2,000 consumers in an online study. The results of the study highlight consumers’ opinions on instant financing and what consumers expect from the checkout experience.

  • 47% of people surveyed would like to be presented with an instant financing option while shopping online
  • 40% of people surveyed would spend more money on a purchase if they had the option of instant financing
  • 73% would spend more money with an online merchant that offered instant financing, compared to one that didn’t
  • 74% of respondents would spend more money online, if offered instant financing, than in a retail store
  • 75% would be likely to select an online merchant that offered instant financing over one that didn’t.

Instead of being forced to pay for the entire purchase up front, or with a credit card, instant financing enhances customer confidence and boosts their buying power. By offering customers the ability to pay over time, merchants have the potential to drive significant business. The freedom and flexibility to pay over an extended period of time has the potential to increase Average Order Value (AOV). That’s a competitive edge any merchant in today’s crowded e-commerce space should be taking advantage of.

Instant Financing Benefits for Customers

Besides considering how a specific payment solution might fit into their business model, merchants must also consider the customer end of the equation. The customer experience in payments comes down to the four s’s: speed, security, seamlessness and, of course, smoooth.

For example, when a customer engages with Klarna’s instant financing options, they’re presented with a simple, three-step instant application process that sets the tone for the entire checkout experience.

Instead of being redirected to another site to complete the financing application, Klarna lets the customer stay put, streamlining the application process and assuring them that their information is safeguarded on a site where they’ve already established trust. This has proved to decrease shopping cart conversion rates by as much as 26%.

Customers don’t have to bother filling out lengthy personal details or credit card numbers. Regardless of which digital channel they’re engaging with (desktop, tablet or mobile), customers can complete their purchase quickly and without added friction.

Beyond the convenience of easily applying for instant financing, working with Klarna’s solution provides an open-end line of credit. This means customers don’t have to re-apply for new financing should they return to purchase another item from a site. For merchants, this is an easy way to build brand loyalty and encourage a customer to come back again. From the customer standpoint, once they’ve engaged with instant financing, they can apply the same qualification details to other online retailers who use Klarna’s solution.

Here’s a quick refresher: instant financing is completed in three simple steps, eliminates redirects to other sites, indicates quickly to the customer to pay either in equal monthly installments or with a revolving credit line, and gets customers completing their purchases faster, more easily and with more confidence.

Is there anything else you could ask for?

The Instant Financing Demand

Regardless of the type of business, consumers expect payment options and they expect the payment process to be fast. The quicker financing approval is processed, the better chance merchants have to increase AOV, boost conversions and win over customers who are all about instant gratification.

With more e-commerce choices entering the retail ecosystem, consumers are going to continue to expect more from merchants. Customer experience is increasingly influenced by a customer having greater control to pay over time at checkout. Retailers who aren’t capitalizing on the instant financing trend are already missing out on the chance to drive more sales and attract more customers.

Still not sure whether to integrate instant financing? If you want to keep up with customer demand and give your shoppers a smoooth way to pay, then let’s talk.