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Customers and Demand
| Characteristics | Current situation | Future trend |
| Segmentation of customers | Loans in the points of sales are provided to people who cannot afford a purchase at the moment but actually want to do it. Points of sales are large retail chains which sell appliance, furniture and wide variety of goods. In general, POS–loans targets people from 21 to 59 years old with average and below-average level of revenues who want to distribute financial burden associated with purchase due to small monthly payments. As it is not necessary to provide documents from working place, POS-loans can cover segments of people who get officially small nominal wage and cannot obtain a typical loan in the bank. That’s quite large part of Russian population: about 40% of employees get officially low wage. Inside the target group there can be distinguished small segments by their payment ability. In such way, for every group banks provide pos-loans under different conditions: with first payment and without, from 3 months to 36 month and so on. | In close future POS-loans service will encompass young people 18-25 years old in student status who don’t have permanent place of work. Though it’s pretty risky segment for giving a loan, but it doesn’t mean that it’s necessary to ignore such large market share. Maybe, pos-loans service will require warrantor or additional documents from this category of clients. |
| Does a buyer's purchase volume represent large fraction of typical seller's sales revenue? | At the present time, the market of POS-loans represents approximately 4,3% from all volume of banks’ retail loans. It’s quite big share if we consider the small money amounts which are given as POS-loans. (POS-loans varies from 3 000 to 300 000 RUR). Thus, in 2010 the Pos-loans volume was 155,4 bln RUR and whole loan market of 3,650 bln. | Under threat of substitutes as credit cards with lower interest rates (22-24% versus 30-55% for pos-loans), the share of banks revenue from Pos-loans will decline to 2-3%[1]. |
| Switching cost | There are high switching costs for customers, because if they took a loan they signed a contract for all loan term, and they have to repay this loan to particular bank until loan’s maturity. So, if a customer wants to change a bank it will not be possible until he repays whole loan. Surely, if customer is going to take another loan in different bank, he can easily do it without switching costs. | Banks can create loyalty loan program: if a client has good loan history in particular bank, this bank can offer special (lower) interest rates for that client, because he can be considered more reliable and almost risk-free. So, in this case there will be high switching costs for a client if he decided to change the bank. |
| Can buyers find substitutes for industry's product? | There can be considered a number of substitutes for POS-loans. Among them pawnshop business (on the Russian market and 0.8 mil people are using their services); personal bank loan (in bank’s office); microfinance market; borrowing money from friends and relatives. All these substitutes are execute the same function: a borrower will get money for his purchase, but it will be more time-consuming for borrower and will comprise transportation costs, while POS-loans deliver money to client in 15 minutes and in the point of sale, which is great advantage. | In very close future POS-loans will be substituted by credit cards. This pattern works well all over the world and outperforms considerably POS-loans, because the interest rates which a bank requires are much less (23%) than POS-loans (33-60%). Also a credit card can be taken everywhere and pay in every store, so the need in POS-loans will decline considerably[2]. In addition there is an opportunity to change the format of business: stands with bank’s employee in retail chains can be eliminated. A retail chain seller will be able to help customer to choose comfortable loan program in any of partner-banks. Also seller will proceed with loan application and confirmation of loan[3]. |
| Price elasticity of market demand | The market of Pos-loans is in high-demand at the present time in Russia: 25 million people get pos-loans service every year.** But in the same time we can affirm that market demand is very inelastic, which is stipulated by psychological peculiarities. As pos-sales are offered just in store people often make impulsive purchases not thinking much about rates due to emotions, store fuss and lack of knowledge about worth of loans. This fact explains why interest rates on POS-sales loans are so high (sometimes rates exceeds 70-100%)[4]. | Demand will become more elastic when credit card substitute is available. Customers will have more time to think of their purchases and loan requirements. |
| Price elasticity of demand for typical firm | Due to large variation in interest rates (from 33% to 70% and more depending on loan term and conditions) and obscure loan contracts (often, interest rates which are listed show simple interest but actually it should be compound), it’s not so obvious which pos-loan stand offers best loan-solution[5]. All these factors together with overall inelastic market demand lead to low customers’ sensitivity about loan prices. That’s how can be explained existence of banks that earn huge interest on cheap goods that a customer buy with help of such loan. | As people become more financially educated they will soon differentiate adequate loan offer from loans with extremely increased interest. That will lead to increasing of demand elasticity for all market and for typical firm. Because banks will start to attract clients by lower loan tariffs. |
| Price elasticity of various customers | There can be separated several customers’ segments. People who cannot get official personal bank loan. Their demand is inelastic. To this group can be joined people from low society level, who cannot distinguish among different loans types which seem to be almost identical from first view. Another group is people with below average and average income that have lack of money and plan their family budget very careful This segment is more sensitive to price differences, in general such people less objected to impulsive purchases. So, this segment has elastic demand and very attentive to price changes. Also there is a segment of people who are objected to spontaneous desires: to buy immediately some product they liked. This segment also has inelastic demand and doesn’t care much about loan conditions, such people just choose a stand with lower line and nicer advertising. | The situation with price elasticity of mentioned segments will stay the same, but in some future proportion of these segments will change. With stabilization of economy more and more people will be paid with official salary. So, finally overall demand becomes more elastic. |
| Price discrimination (actual and potential) | As an example of price discrimination we can consider different loan condition depending on income level of borrower. Usually, price discrimination implies that a firm wants to get more money from those who have higher income. But in loan industry it works inversely. Higher you make initial installment – less you pay for the loan as interest rate. People who do not dispose enough money and are unable to make enough initial installments objected to pay higher price for the loan. | Price discrimination is not effective way of attracting clients in banking industry. In contrast, banks are interested in clients with high and stable level of income (because of risk-aversion), so this segment always will get better conditions of all banking operations than low-income people. |
| Versioning (actual and potential) | POS-loans offers considerably vary in conditions. There are several parameters of variation: loan term (from 3 months to 36 months), size of initial installment (from 0% to 90%) and type of goods which are going to be bought with the loan (sometimes banks have special agreement with retail chain and goods manufacture as well). Versions actually depends on paying ability of borrower in such way, that almost every customer can find loan conditions that will satisfied him (in case if customer wants to take a POS-loan) | |
| Bundling and Tie-ins (actual and potential) | In bundle with retail loan products, the majority of banks also offer insurance services. Among widespread insurance programs: Life and health insurance, lay-off insurance and property insurance. Sometimes this service is provided by bank’s subunit. For example, pos-loans brand Cetelem (subunit of BNP Paribas group) offered insurance of group’s functional unit - Cardif. Actually such insurance service doesn’t make a lot of sense, because terms of pos-loans are short (average 1 year). But some banks refuse to provide loans without insurance. At the same time in bundling with insurance service loan’s effective annual rate rises up to 80-90%[6]. | Taking in consideration credit cards which are going to replace pos-loans in some future, it seems to be plausible that banks will offer credit card registration in bundle with pos-loan. In this case, banks will receive additional fees and will get loyal client. |
| Are prices negotiated on each individual transaction or set as take-it-or-leave-it" for all transactions? | Prices for POS-loans are not adjusted for each individual loan because every bank has own fixed tariffs for its service. But variation of loan tariffs sometimes exceeds 100 offers[7]. Offers depends on loan terms, initial installment and, sometimes, specific of goods that are going to be bought with loan. In average interest rates on POS-loans vary from 40% to 60%[8]. | As we think the situation will not change much, maybe a list of tariffs will shorten in some future, because a big number of unclear tariffs can frighten off some potential clients. As analogy we can consider American airlines case. To improve its business the company decided to cut a list of tariffs and leave just several of them but clear for customers. |
| Do buyers pose credible threat of backward integration? (for B2B) | B2C | |
| Does product represent significant fraction of cost in buyer's business? (for B2B) | B2C |
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