Rising interest rates unlikely to affect payment by instalment in Malta – retailers

The European Central Bank’s decision to continue increasing interest rates is not expected to have an impact on consumers paying for big ticket items by instalment, say retailers, most of which operate such schemes in-house, without the use of third-party loan facilities.

Many retailers abroad partner with companies such as Klarna to handle such agreements, known as Buy Now Pay Later (BNPL) facilities, with the seller receiving the amount in full and the third-party operator effectively extending a loan to the buyer. Such financing opens the door to interest rate risk.

Although such arrangements are rising in popularity in Europe, many Maltese retailers simply take on the risk themselves by making direct contracts with buyers.

Speaking to BusinessNow.mt, John P. Casaletto, CEO of Intercomp, a computer and tech hardware store, says that the company’s Easy Payment Scheme “is a very expensive and risky operation”.

“When you factor in the bad debts, and the cost of the team to run this system, we effectively run this as a non-profit service to help our clients buy their devices.”

Giving some insight into the scheme’s inner workings, Mr Casaletto says it is not operated through a third party.

“We run this ourselves, which means that we have to pay our suppliers in full for all items sold (typically within normal business payment terms) while we get typically get paid by our customers over 24-36 months.”

Asked whether rising interest rates may affect these monthly payments, he replies that it is the company which incurs such costs: “Once a customer takes out a monthly payment plan, the price is fixed. These payments will not be impact by rising interest rates.”

The cost for the company, however, is considerable: “Inflation in the tech industry has actually been very significant, with frequent back-to-back cost price increases (made worse by surging freight costs and the US dollar working against us).”

Mr Casaletto explains that profit margins in the tech industry are low, so retailers have choice but to pass on these cost increases.

“However, not all customers accept or understand this. So, although not easy to measure, this has definitely impacted company sales over the past year or so.”

However, tech prices have “an upper ceiling dictated by our local competitor pricing and international retailers such as Amazon. So, we cannot simply pass on cost increases (such as this interest rate hike) to customers in the form of higher prices. Therefore, the additional interest rate hikes will ultimately be borne by Intercomp.

AtoZ, another technology retailer, also offers it BNPL service independently, without any third-party intermediaries, says its CEO, Marvin Sammut, who similarly notes that inflation is hitting the sector hard.

However, he also says that its BNPL offering will not be impacted by rising inflation, except through the increase of the initial price.

Both Mr Casaletto and Mr Sammut assured that customers with existing agreements will in no way be impacted by either rising prices or higher interest rates.