Promotional Financing for Small Retailers - Summer 07

Giving
Credit
28 | InsideOutdoor | Summer 2007

SMALL RETAILERS SHOULD TAKE
ADVANTAGE OF PROMOTIONAL FINANCING
by Tony Jones
Small retailers can be at a disadvantage with
big-ticket items because many do not have
a convenient way of closing or sweetening
the deal if a customer does not have enough
available cash to make the purchase or doesn’t
want to use current lines of credit.
Placing merchandise on layaway is certainly an option
but leaves customers feeling unfulfilled and creates lag
time for when that customer may make a repeat purchase.
There also are inherent risks that customers won’t fully
pay off or claim the merchandise, and there is zero opportunity
to up sell the customer at the time of purchase.
Small retailers that can offer financing, with deferred
payments and interest, can provide tremendous value to
customers. The ability to offer a customer instant credit
at the cash register means a quick close to the sale, a satisfied
customer and a reduced chance that the retailer
could lose that customer to a larger retail competitor that
offers a private-label or co-branded credit card.
But most small stores simply don’t have the volume
or sales to be able to participate in a private-label or cobranded
credit program.
GE Money’s Sport Finance Program may help level
the financial playing field. The program is a scaled-down
version of its private-label offering and is designed specifically
for small retailers to leverage financing as a promotional
sales tool and customer loyalty service.
In its private-label business, GE Money works with retailers
such as Wal-Mart, Lowe’s, Dillard’s, Bass Pro Shops
and Dick’s Sporting Goods. Those retailers offer customers
a store-branded card, and the customer is not necessarily
aware that GE Money is behind the financing.
The company currently has programs running inside
approximately 100,000 retail locations in 20 different industries
and serves more than 130 million account holders.
It’s fledgling Sport Finance Program, in contrast, is
less than a year old and is running with just 450 merchants,
about 200 of which can be categorized as outdoor
retailers, says Dennis Murphy, vice president, sporting
goods, GE Money – Sales Finance.
Within the sport category, GE has targeted the outdoor
industry, bicycle industry, golf, ski and fitness because all
of these retail segments tend to have expensive equipment,
says Murphy. Without being able to offer customers
financing, retailers may be losing out on sales.
“We’re trying to bring the program to smaller retailers
so that they really have a tool they can use to compete
with larger chains,” says Murphy.
To that end, GE has crafted “an industry-wide program,
offering a turnkey solution to smaller retailers that
don’t normally qualify for a private-label program.”
Retailers can offer 90-day, six-month and up to a year
time frames in which customers are not obligated to
make payments and accrue no interest. Customers can
apply for a line of credit up to $10,000 and, if approved,
receive a GE Money credit card within 10 days that has
the retailer’s name embossed on it.
By that token, the Sport Program is not really privatelabel.
But it doesn’t need to be. The program establishes a
dedicated line of credit between the retailer and the customer
which is backed by GE Money. The line of credit
can only be used with that retailer.
“Think of it as a merchandising tool,” notes Murphy.
“It gives the outdoor retailer a way to move merchandise
by offering promotional financing. No payments and no
interest for a certain period of time.”
On the whole, the program appears to be cheaper for
retailers than typical bank cards. For example, if a retailer
opts to offer a customer a 90-day, no payment, no
interest promotion, the cost for the retailer is just over 1
percent of the purchase total. Most bank card swipes are
in the neighborhood of 2 percent for the same transaction,
says Murphy.
And, if the customer comes back into the store and
uses the card under normal parameters (no promotion),
which is a standard 25-day grace period before interest
begins to accrue, the retailer pays zero on that particular
transaction.
“Retailers can offer more value to the customer by
making it very easy to acquire merchandise, as well as do
themselves a favor by lowering their costs to credit and
improving their margins,” says Murphy.
The longer the deferral of payment and interest, the
higher the discount rate the retailer must pay. For a sixmonth
no-payment, no-interest promotion, the retailer
would pay about 3 percent (about the same as American
Express), and on a longer-term promotion the discount
rate might be as high as 5 percent or 6 percent.
GE Money makes its money from the discount rate,
as well as from interest accrued if customers take longer
Summer 2007 | InsideOutdoor | 29

than the promotional period to pay off the debt. The card has an
annual APR of 23 percent. The company also could collect late
fees, if customers made delinquent payments.
By themselves, individual small specialty outdoor retailers
aren’t a lucrative market for GE Money. But taken on aggregate
as a collective volume business, GE Money is banking that
small retailers will make the program worth while.
The Sport Finance Program is a turnkey solution for retailers
in that GE Money provides a dedicated credit card terminal,
marketing materials and signage, staff training and continuous
support, all at no cost as long as the participating retailer meets
the minimum charge volume of $36,000 a year.
GE handles all customer billing, and the retailer is not responsible
for any collections or owed sums should a customer
fail to make payments, says Murphy.
Once retailers are up and rolling they can expect to see 10
percent to 15 percent of sales transactions using the GE Sport
credit card, notes Murphy, as long as they do a good job of
pushing the program.
In general, Murphy says the program is most beneficial
for retailers that pull in around $500,000 a year in receipts,
although there are a handful of retailers in the program that
sell less than that.
One option for retailers that sit beneath that sales threshold
is to pay $39 a month to be part of the program. Some retailers
may want to consider this if it would be beneficial for them to
run the program for a couple of months during a busy selling
season, offers Murphy.
In general, sporting goods customers are a good credit risk.
Although GE Money will provide credit limits up to $10,000 in
the Sport program, Murphy says the typical credit line is less
than half that. In addition, the typical customer uses only a fraction
of available credit, leaving open-to-buy dollars that can be
used for other retail promotions.
In all, about 70 percent of applicants in the sporting goods
segment get approved for a credit line, with the minimum
amount being $1,000. However, even if a customer’s credit is
not the best and he can only be approved for the minimum, GE
Money will try to make accommodations.
“We have something in our system called Meet the Sale Logic,”
says Murphy. “If someone comes in with fairly good credit,
we will do everything we can to meet the sale.”
Thus, if a customer qualified for only the minimum ($1,000)
but was looking to make a total purchase of $1,100, GE would
in all likelihood “meet that sale and approve the customer up to
$1,100 in order to help that merchant make the sale,” he says.
That philosophy is in line with the structure of the program,
which is designed to make implementing and using the program
simple, leaving the retailer to focus on the core business
and how best to incorporate promotional finance into a store’s
sales strategy.
For example, the customer application process takes only
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about five minutes. As soon as the customer is approved, her
account is open and purchases can be made. This is the perfect
time to be able to up sell the customer on an item that he or she
may have been considering prior to the credit application.
If the customer decided to open the credit line to make a
large purchase, he or she may also opt to buy accessory items,
since there won’t be any payments due or accruing interest on
the purchase for at least 90 days, depending on the program.
In terms of demographics and behavior, Murphy says most
first purchases tend to be for large-ticket items or totals, with
subsequent purchases resembling more of a normal debit or
bank card transaction.
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Interestingly, the typical cardholder, he says, skews more
toward a middle-aged, family profile. “You would think this
would be skewed toward younger customers,” he says, “but
then if you think about it, our approval rates wouldn’t be as
good as they are.”
The age factor could also be a reason why customers have an
excellent track record for paying off purchases within the time
of the promotion.
“These programs work well when the consumer sees value
in the product,” continues Murphy. “The ability to defer payment
is seen as a real benefit, and for many, it will make a lot of
sense to go ahead and apply for the credit.”
Once retailers have been in the program
for a while, they will begin to adapt
in-store procedures to incorporate the finance
program naturally. They may also
be able to formulate new target marketing
plans that perhaps give cardholders
a different status than other customers,
making them privy to after-hour sales or
specific discounts not offered to the general
public.
A finance program such as this is all
about customer satisfaction and loyalty.
Devising programs that give your best
customers reason to continue to use the
card will increase the value of the program
to the store’s operation.
“We’ve got a fairly large chain (in a
private-label program) that really sees
the value in this, and they’re offering a
discount to apply for the card on their
lower priced merchandise because of the
larger margins,” says Murphy. “They’re
offering up to 20 percent off. They are
specifically targeting their higher-end
margins where they can afford to bring
more value.”
The idea is to build the customer base,
and then entice them to use the card
The program could be particularly
useful in holding off significant markdowns,
by offering an extended deferral
program.
“Before you mark that down 50 percent,
why don’t you put it on a 12-month,
no payment, no interest promotion?” asks
Murphy. “It may cost you 6 or 7 percent,
but isn’t that better than whacking it by
30, 40 or 50 percent?
“There are a lot of nuances,” he says.
“As people get more and more educated
on the program and learn how they can
sell, there are a lot of things that we can
teach the merchant that they can use to
help protect the overall price points in
their store.”