Peer to Merchant lending

Merchants usually require financial services, such as cash advance loans and customer payment facilities, which are costly services. Co-here aims to reduce both of these costs to participating merchants, by connecting merchants with their customers over a longer period than instant payments, by aligning merchant needs for a cash advance with customer loyalty, through a prepaid subscription model with generous discount rewards.

Merchant patron reciprocity

Customers have ongoing merchant patron relationships with many businesses, frequent and recurring, some of more personal significance. Some merchants are located in a customer’s locality, some in a different region. For example some merchants may designate their locality at a national or global level. Never the less, a long term loyalty arrangement can benefit merchants and customers.

Prepaid subscriptions

An alternative to regular institutional forms of lending to a merchant for principal plus interest could be in the form of a customer prepaid subscription with loyalty discounts.

In this prepaid subscription schedule there is a gradual increase in the discount rate each week, which amounts to savings for the customer, with an understood agreed discount rate over the full term. The advantage of this prepaid subscription model is the facility to be paused, or terminated with a refund, for the remaining prepaid allowance.

prepaid subscription with puase and refund option

For an example a local gym offers a prepaid subscription for 52 weeks with an overall price discount of 19.5%. Let’s say the offer is $858 for 52 weeks for access to classes and the gym, which equates to $33 a fortnight. The post paid amount would be $1,066 for 52 weeks. The prepaid discount saves the customer $208 over 52 weeks, 19.5%.

Progressive discount schedule

During the subscription term, weekly installments are subtracted from the prepaid subscription allowance, the refundable prepayment. The refundable amount progressively reduces with each weekly installment according to a discount schedule.

The discounts schedule starts at 0% in week 1. Then increases by an increment each week – in the example the increment is an additional 0.77% per week (actually it’s 0.7652% but I’m rounding up here for simplicity). In the 3rd week the discount is 2x the increment (2 x 0.77 = 1.54%). In the middle of the subscription the discount is half way between 0 and the maximum (week 26 x 0.77 = 20%). Until the maximum discount is reached in the final week (week 52 x 0.77 = 40%). The over all discount over the full subscription is half of the maximum (20% over all).

A “progressive discount schedule” provides an incentive for the customer to continue with the subscription and for the merchant to capture a larger proportion of the prepaid subscription earlier than a flat rate schedule. While it also provides for a way for the customer to pause or cancel the subscription and receive a refund for the remaining prepaid balance.

Setting aside the various amounts

To ensure the prepaid subscription is used for its intended purposes the funds could be set aside in to various pools, shared by all subscriptions with that merchant, and budgeted for specific purposes.

The expected amount required for transaction costs over the full subscription term is 1%, this would be pooled from all subscriptions and transaction costs deducted as an expense to the merchant. If transactions are indeed lower than 1% this amount can be reduced.

A top-up refund pool would receive 9% of the funds, shared by all the subscriptions with the merchant. While 90% of all subscription prepayments would be allocated to an allowance pool for paying down the subscriptions.

Merchants receive payments in 4 installments:

  • 30% of each subscription in the beginning of week 2,
  • 30% in the beginning of the 2nd third of the subscription term,
  • 30% in the beginning of the 3rd term. The merchant would receive
  • 9% of the subscription payment in the final week from the top-up refund pool.

Pauses and Refunds

A “pause request” simply delays the counting of the start of the following week in the subscription term, until the customer makes a “resume subscription” request.

In case of a “refund request” from a subscriber, the refund would be accounted from the following week and sourced 1st from the allowance pool and secondly from the top-up refund pool.

Clear standards to compare offers

Prepaid subscriptions could have standards shared by merchants in similar sectors, automatically derived from the average of all subscription offers in a specific locality or region, which help merchants and customers understand the offer and its benefits and compare offers.

There may be an average or standard offer in a particular sector, such as cafes and restaurants, and another standard offer common for retail clothing merchants, or for newspaper / magazines or for travel agencies, or for performance, theatre and cinema houses etc.

As an example, a merchant may have a subscription offer which has a lower or higher discount than the average offer in that sector and locality. However, the merchant’s customers may be also well aware of other factors in considering the subscription offer, such as the retail price already relatively lower than other merchants or a higher quality of location, decor, customer service and the products provided.

A new way to look at the familiar

Prepaid credits, subscription and loyalty discounts are not uncommon, yet they could be seen as a way for a merchant to gain funds in advance of delivering services and for customers to receive far more generous discounts for the patronage they would have otherwise had as casual customers.

Co-here will facilitate these types of merchant / patron prepaid subscription offers by setting out clear standards and procedures shared among participating merchants, which can be easily understood and compared. Co-here will provide the software, ledger and transparent funds tracking, with specific allocations for automated payments, pause option and the refund facility.

Merchant promotional opportunity

Another ripple (network) effect may be through peer to peer recommendations. Peers may spread news or a recommendation about a worth while prepaid subscription offer they enjoy or simply recommending their most recent favourite merchant which happily accepts local tokens. Merchants may offer a bonus loyalty reward to customers for successful recommendations.