CASH ORDER TRADING.

Grey River Argus, 18 April 1929, Page 3

CASH ORDER TRADING.

Pros and Cons. (By E. P. Neale, D.Se., M.Com., L.L.8,. F. 8.5.) In view of a set ing up of a Commission of Inquiry under the Board of Trade Act. into the Cash Order System, it is of interest to describe briefly the j-vstim and to examine what is to be suid for and against it, e pecially us here are widespread public misconceptions on the subject, even on the part of leading city newspapers.

Cash Order trading is a system whereby, for the purpose of giving .-redit, a third party, a loan company, steps in between buxer and retail seller and without in any way handling the goods concerned, finance • the transaction between custtoner and retailer, charging, interest and commission for the accommodation; a furl her dis count being exacted by the loan company from the retailer in consideration of the extfla business brought him by the Cash Order Company and of the guarantee of cash payment afforded him by the Cash Order Company. - The Cash Order System is a form of the instalment or hire purchase plan in that it involves a transfer of wealth, the payment for which is deferred in part to the fu.ure and is ’iquidated piecemeal under a plan agreed upon at the time of transfer. It differs from ordinary instalment or hire purchase transactions in that: 1. The third party guaranteeing he credit comes more prominently into the 1 uyer’s picture and has different relations with both the buyer and seller of th e commodity or service sold from those which are usual ir. the case of in taimen plan transactions. 2. In practice the cash order system, unlike the instalment system, applies .especially to non-durable goods op services individually of small volume and whose market value in most instances disappears more or less entirely after fust use, and for this reason are not suitable object for a lien. A person requires certain goods; ho has not the ready cash to purchase them, ami he cannot induce the retailer to give him credit, lie secures an Order for the required sum from the Cash Order Company, and on surrendering this obtains- from any of t’.e firms mentioned on the Cash Order Company’s “list” goods or services to the value stated on the Order. He is expected in due course to repay the Cash Order Company the amount of the Order plus commission, etc.;, by regular instalments. The retailer who accepted the Order and supplied the goods presents the Order in turn to the Cash Order Company and. receives payment according to arrangement, less the agreed upon commission or discount (usually about 10 per cent). It is scarcely practicable for a retailer to charge a customer purchasing with a Cash Order more than the ac tual cash price, as ther e is no means whereby shop assistants can know before the selection has been made and the Cash Order presented that the transaction is other than a cash one. For the service of securing goods or services of iimp without an addition to the price, the Cash Order Company charges its client a commission The retailer accepting the Cash Order does so with the knowledge that he takes no risk, as prompt payment of the amount by the firm issuing the Order is assured.

For this service of providing prompt payment, coupledi with the addition to to turnover the re ailer’s association which the Cash Order Company secures, the allows the Cash Order Company a commission o’* discount on the sale. The Cash Order Company derives its incom c from two sources—in part from the purchaser who uses the Order and in part from the retailer who accepts it. The chief application of the system in New Zealand has so far been in clothing and footwea r trades; these two lines probably accounting for at least 90 per cent of all cash order transactions. The balance is spread over hardware, furnishing, denial work etc. The system has long been in operation in New Zealand, but it is only in recent months that it has assumed

large proportions and attracted public a. tention. The advantages of the sy-tem are:— (a) From the Buyers’ Point of View. 1. It may be contended that he obtains goods on credit from the retailer at cash price without any loading of price by .he retailer for the credit granted. This advantage, however, ceases if and when the system becomes general. (See disadvantage 1). Moreover, in any case of epurse the buyer pays the cash order company a commission for the accommodation. The practice of making a definite charge in addition to cash prices for the convenience of Credit Accommodation is recognised as being a jus.ifiable practice in all forms of trading. The practice is sometimes varied by fixing the price at which goods may be supplied on credit and allowing a discount for ca h; but the principle involved—that of charging for credit—remains the same. Th? question. however arises: is the charge so made under

he Cash Order System a fair one? On this point see disadvantage (c) 4. 2. People of slender means who require credit, particularly at times of hort working o r unemployment, or after a period of serious illness in the home to obtain necessaries such. as clothing, footwear, etc., for ‘he household, ar e enabled by the Cash Order System to obtain that which the retailer would probably not otherwise supply to them. Thus they are enabled io purcha e from retailers at •ash prices at times advantageous and convenient to themselves and without having to wait until they have accumulated the necessary cash. 3. In so far as cash order purchases replace ordinary loose credit they probably tend to the acquisition o f more regular ha hi s re saving on the part of buyers. (b) From tha Retailers’ Point of View. 1. Until the system becomes more or less universal th c retailer appearing on the Cash Order Company’s “list” accepts the system because it brings to him a large volume of additional trade which he probably would not otherwise have obtained. The customer beginning with a Cash Order may remain as an ordinary cash or credit customer. When in funds he returns to the same shop and may purhase for cash as well as bringing friends with him who may also spend cash. To appear on the lists of a Cash Order Company is in effect to receive an advertisement. The cost of extra adver isoment, of canvassing and* travellers, is. at least in very many cases, greater than the commission or discount which the retailer pays to the Cash Order Company. In this way the retailer appearing on this lists increases his custom at the expense of o-her retailers. In this connection see also disadvantage (c) 1. 2. The Cash Order to the same cxtent that it eliminates ordinary loose credit saves the retailer book-keeping and expenses and cuts out bad debts and indefiniteness as to when customers’ obligations will be me . The retailer instead sells his goods and receives cash. He retains no risk and has no expense of callection. These fall entirely upon the Cash Order Company, provided, of course, that the Cash Order Company is not issuing orders t 0 an extent not warranted by its capital. If there were general cause for complaint unde r this head, there would be a call for legislation to compel Cash Order Companies periodically ►to register, it being a condition precedent to registration that th e authorities bo satisfied that the capital of the Cash Order Company was adequate in proportion to the volume of business it was doing. 3. It relieves the retailer of the difficult task of deciding on the credit rating of a prospec.ive customer. Open credit is frequently abused by dishonest persons, resulting in bad debts mounting up on th? books of the re tailor; who is usually not specially qualified to judge the credit standing of individuals. Retail traders and professional men anxious to supply the requirements of would-be buyers frequently hesitate to do so because they find) it impracticable, and in many

■ses impossible, to instal the necessary credit departments. The Cash Order trader offers to serve both the would-be buyer and the would-be seller by placing at their disposal his financial stability and his expert knowledge of handling retail credit. Under the Cash Order System an expert cre-

dit rater (the Cash Order Company) judges the risk. (c) Thj Disadvantages of the System from the Buyers’ Point of View. 1. See Retailers’ Di.-a van ages No. 1, last sentence. 2 .In the interest* of wage earners it is desirable that only a certain limited amount of cred.t should bp granted them, and the system tends to increase <he amount. The- more in d bt ■the wage-earner is the more serious the position that arises when misfor tune supervenes. 3. The sy tt-m, like all other systems of easy credit, tends t o encourage extravagance and irrational ex penditure on articles of little real use fulness and at the expense of useful neces aries. 4. Frequently the full amount that the customer is asked to pay for the accommodation is disguised by the quoting of rates of “interest” on an other than annual basis. It would b< an advantage if Cash Order Companies were required by law * o disclose the real rate per annum charged. Nominally the client, is charged 10s or thereabouts in addition to the value of the goods purchased, and the whole is repayable over usually twenty weeks. This is equivalent to somewhere about five per cent per annum, though ‘he charge is not pure interest, covering as it does in addition cost of book keeping and collecting, provision for bad debts, etc. 1

5. The risks to the Cash Order Company are probably greater than in ordinary instalment selling transacions, because:— (a) The company and the ven lor have no lien on the goods sold, s 0 that repossession is difficult. (b) In any case th e articles com monly sold under the- cash order system (unlike those sold under the instalment plan) are more usually such that when once used their market value is more or less completely gone, so .hat even if they are returned by defaulting buyers they are largely worthless. These facts point to a higher charge being necesary for accommodation granted by Cash Order Companies than by Instalment Companies: though it must in fairness be pointed ou that the Cash Order System has one advantage against the ordinary’ instalment plan in that the Cash Or de r Company has its regular clients and learns by experience whether or not they are reliable in the matter ot effecting repayments, whereas there is no such experience at the back of the seller in the case of an ordinary instalment transaction, which normally I Is infreqent as regards the buyer concerned, largely because it usually involves so large an expenditure at a time. (d) From (the Retailers’ Point of View. 1. The advantages mentioned in (1) accrue to the individual retail traders taking up the system in a town so long as the per cent, of the total sales in the town affected is small and the loss of profit on this business due to thc payment of commissions to Cash Order Companies is probably offset by thc extra trade it brings—at the expense of the trade of the retailers who decline to adopt the system. When, however the- time arrives when a large proportion of the public are buying on lhe Cash Order System and all retailers are dealing with Cash Order Companies, since the system does not increase the total amount of business done, but only the cost of doing business, the advantages to individual retailers vanish while losses of profit remain. Then increased prices will tend to be loaded on to the consumer.

2. In tae interest 6f keeping down bad debts amongst retailers generally (whether associated) with the Cash Order System or not) it is desirable to grant a certain Emi cd amount only of credit to wage earners. 3. It is not possible, under the Cash Order System, as it is under the ins’ alment plan to “mark up” goods not sold for ca>h. A-s the existence of the Cash Orde r System becomes known to cash customers this tends to render them disgruntled because they, as cash purchasers, feel they should have a discount equal to the commission paid to the Cash Order Comany. Of course there is always a partial answer to such disgruntled) ca h custo

mors which has been thus staled:— “The retailer may take a customer to the warehouse to select goods, and though he does not handle the goods he re elves a handsome profit on the sale to the customer, ami also a discount from the warehouse. He may also give .he customer an Order for goods upon a neighbouring shop, from whom he receives a discount. It is als 0 a common practice among retail traders to ai’ow discounts equivalent to tho-e a-lowed to the Cash Order trader to individuals or combinations of indiv.duals who may be in a position to buy unusual quantities of goed . I. is a matter of common knowledge that such dheounrs are allowed to such bodies as Civil Servants’ Associations, to traders in kindred line , to agents in other centres, hotels, boarding-houses, restaurants, hipping companies, and in a whole host of similar directions.” This is an incomplete answer, however. In the first place the ethics of special discounts to public. servants’ associations or other bodies sufficiently powerful to exact special terms for *hei r members are open to very severe question. Moreover, in all the- other cases cited except Cash Order th? rereceivers of tie discount are such that iations exis ing between the giver and goods are normally transferred between them in large lots- per single transaction; so that the overhead expenses of doing business iif proportion to turnover are substantially reduced and jus ify a lower charge. (See footnote to (b) 2). 4. It will be seen that the cases for and against the system are pretty equally strong, and individuals are likely to decide for or against the system, according to their own personal interests, or according to the varying weight they attach to the different arguments. The Committee of Inquiry has no easy ta-sk before it. P»ut on the whole, apart from the suggestions of the last sen.ence of (c) 4 and the footnote to (b) 2, it would appear that the system does not call for Government interference, an expedient which should be resorted to only In extreme cases and when a clear balance of good is expec ed from such interference. This is the more so in this case as if th e result forecasted under (d) 1 is attained, the relative positions of the various retailers will be more or less “as they were,” and they will realise whether or no the character of thc Cash Order Companies is really parasilic and if the reply is an affimative one they will find* that the remedy lies largely in their own hands.