DTC vs. DTM POS Loans
Which Is Right for You?
As consumer financing options continue to evolve, merchants are faced with a crucial decision: should they leverage Direct-to-Consumer (DTC) or Direct-to-Merchant (DTM) Point-of-Sale (POS) loans? The answer often hinges on a key factor: merchant margins. This post explores how business margins determine whether a DTC or DTM model offers the best fit for your business, or your merchant’s business.
Understanding DTC and DTM POS Loans
1. DTC Loans: In this model, consumers secure financing directly from the lender. The merchant plays a passive role, simply enabling the financing option at the point of sale. Consumers are fully responsible for repaying the lender, with the merchant avoiding upfront fees associated with loan origination.
2. DTM Loans: Here, the merchant actively engages in the financing process. The merchant contracts with a lender, often paying a fee per transaction to offer consumers loan options. These fees are typically a percentage of the sale pric, and are sometimes shouldered by the merchant in exchange for the financing option’s potential to boost sales volume.
How Merchant Margins Influence the Decision
A merchant’s margin plays a critical role in deciding which POS financing model to adopt. Here’s how margin thresholds can impact this choice:
1. High-Margin Merchants: Businesses with higher profit margins are better positioned to support DTM loan fees. If a merchant’s margin can absorb the typical loan fee they may find DTM loans attractive. This fee structure can be viewed as an investment in customer acquisition and sales growth since it’s expected to yield greater revenue through larger and more frequent purchases.
- Example: An elective medical client with high markups can afford a 10% DTM loan fee if it results in a $5,000 sale that might not have happened otherwise. By offering DTM loans, they enhance affordability for the customer without sacrificing their bottom line.
- Considerations: High-margin merchants should consider DTM loans if they observe that financing options lead to higher average purchase values and increased customer conversion rates.
2. Low-Margin Merchants: For businesses operating with slim margins, the cost of a DTM loan fee can be a significant drawback. For example, merchants in sectors like home improvement or other competitive industries often work with thin margins, where a loan fee may be unsustainable.
- Example: A tire retailer with a 10% profit margin may find that a DTM fee eats too deeply into their profit on a $2,000 transaction. For them, a DTC loan where consumers directly handle loan costs can be more advantageous.
- Considerations: Low-margin merchants might find that offering DTC loans makes more financial sense. They avoid loan fees and can still provide customers with the purchasing power to buy bigger-ticket items.
Benefits and Drawbacks of Each Model
| Factor | DTC Loans | DTM Loans |
| Fee Structure | No cost to the merchant | Merchant pays a percentage of the transaction value |
| Profit Margin Impact | No effect on merchant’s margins |
Directly impacts margins based on loan fees |
| Control Over Financing | Less control; lender-driven |
Merchant has greater influence in lender selection and terms |
Key Takeaways
1. Evaluate Margins: If your margins allow room to absorb a loan fee, DTM may be a good option to drive up average order value and overall sales volume. If margins are tight, a DTC loan might be the better approach.
2. Customer Experience: DTM loans offer a more seamless customer experience within the purchase journey, which can encourage loyalty and repeat purchases. If customer retention is a priority, consider the DTM model’s potential to enhance overall brand experience.
3. Business Goals: High-growth merchants willing to make upfront investments to drive higher ticket purchases and customer satisfaction may lean toward DTM loans. Conversely, merchants who prioritize cash flow stability over sales volume might find DTC loans better suited to their strategy.
In the end, the best POS loan model is the one that aligns not only with your margin capabilities but also with your broader business goals. By considering these factors, businesses can leverage the right financing solution to drive sustainable growth and provide value to their customers.
With a partner like Enable Financing, ISOs can support their merchant portfolios with both a DTC and DTM POS lending solution, essentially empowering their merchants with the best of both worlds. With a POS lending partner like Enable, ISOs and their merchants benefit from both the dual POS loan pathways as well as embedded full spectrum lending, powered by a waterfall of 40+ lenders this ensures that essentially every customer can be offered a lending solution.
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