If you’ve shopped online lately you may have noticed more payment options besides credit cards. Many retailers have introduced point-of-sale (POS) financing, also known as “buy now, pay later”, in which consumers can make low or no-interest installment payments for purchases.
Point-of-Sale Financing in E-Commerce Retail
Many items from Peloton bikes to appliances can be purchased with point-of-sale financing from FinTech companies such as Affirm and Afterpay. FinTech companies provide point-of-sale loans to consumers who are either instantly approved or denied to finance a purchase. Consumers can select a payment schedule for monthly installments or pay in full on a future date. For consumers with either good credit or short cash flow, these POS loans provide payment options that tend to be more favorable than high-interest credit cards.
Aside from helping consumers, POS financing is beneficial to retailers by creating more sales volume with less risk. Only a few e-commerce companies offer private label credit cards which provide rewards and loyalty for repeat customers. Point-of-sale financing fills this gap while expanding consumers’ buying power.
Point-of-sale financing is a win-win for the customer and retailer. The customer gets immediate satisfaction from the purchase and the retailer makes a sale while passing risk to the FinTech company.
Revenue Recognition for Point-of-Sale Financing
With point-of-sale loans, retailers can recognize revenue immediately. Once POS financing applications are approved and the product is shipped, the retailer’s performance obligations are fulfilled. Suppose a customer purchases a dress from a favorite retailer for $300. At checkout, the customer is approved for POS financing, payable in 4 monthly installments of $75.
The retailer records the following journal entries:
| Account | DR | CR |
|---|---|---|
| Accounts Receivable | $300 | |
| Sales Revenue | $300 |
To record sales revenue.
Following the matching principle, the company must also record the costs associated with the transaction.
| Account | DR | CR |
|---|---|---|
| Cost of Goods Sold | $100 | |
| Inventory | $100 |
To record the cost of the dress and the reduction of clothing inventory.
Even though the customer will pay for the dress from the retailer in 4 equal installments, those payments will be made directly to the FinTech company providing the point-of-sale loan. When the FinTech company approves a transaction, they also assume the risk of the transaction – if customers default on their repayment schedules, the FinTech company must attempt to collect the unpaid balance.
The retailer will receive a lump sum payment from the FinTech company a few days after the sale, net of any commissions or fees related to completing the sale. FinTech companies earn revenue through interest and fees charged to the customer. They also earn a commission from the retailer for completing the transaction and assuming the additional risk.
Suppose the retailer has agreed to pay the financing company 5% of the sale, the following journal entry is recorded:
| Account | DR | CR |
|---|---|---|
| Sales Commission | $15 | |
| Commission Payable | $15 |
To record commission fees for order #4578075.
When the transaction is settled, the retailer receives $300 from the FinTech company as follows:
| Account | DR | CR |
|---|---|---|
| Cash | $300 | |
| Accounts Receivable | $300 |
To record cash payment for settlement.
Finance Operations for POS Financing
Though this new payment option benefits consumers, online retailers, and FinTech companies, POS financing can be a headache for finance teams as it adds another layer of complexity on top of existing manual processes. With POS financing accelerating at a rapid pace and more companies adopting the new method everyday, finance face an uphill battle.
Finance leaders must respond with agility rather than reactivity to establish their company’s finance operations. A well-oiled finance operations machine will enable entire finance teams to do more with less. Instead of drowning in spreadsheets, they can be strategic partners to the business. With real-time data at their fingertips, finance can provide additional visibility into Accounts Receivable, Sales Commissions, and even revenue breakouts by payment type to identify areas of opportunity.
