Thursday, March 25, 2021 | Greg Ulankiewicz
The definition of credit is the ability to obtain money, goods or services with the expectation that repayment will be made in the future. In case that wasn’t clear enough, recent entrants in the lending space have introduced new solutions dubbed “buy now, pay later.” These online and app-based lenders may currently be niche players, but they are part of a growing trend of new flexible lending solutions.
While there are nuances among them, firms such as Afterpay, Affirm, Klarna, Splitit and even PayPal offer buy now, pay later services that enable consumers to instantly split online purchases into installment payments usually at low or zero interest. For example, consumers who use Afterpay or PayPal’s Pay in 4 can split purchases into four biweekly installments at zero interest, with fees assessed for late payments. By offering low-rate, fixed-term loans at the point of purchase, the obvious threat to traditional financial institutions is these services cutting into credit card relationships.
Major credit card issuers have taken notice and are leveraging their digital platforms to offer their own flexible lending solutions. The My Chase Plan® from Chase, Citi® Flex Pay from Citigroup and the plan portion of Pay It Plan It ® from American Express give cardholders the ability to split recent credit card purchases in excess of $100 into equal installments. These services could be viewed as posthumous lending.
Last year, Citigroup partnered with Amazon to present its Citi Flex Pay option at checkout, effectively replicating the buy now, pay later experience. Another variation from Citigroup is its Citi Flex Loan option, which allows cardholders to carve off a portion of the available line into a fixed-term loan with fast access to funds via direct deposit. This feature effectively facilitates self-service, on-demand borrowing.
In addition to establishing payment discipline, these plans commonly comprise a lower rate of interest than the standard card rate, or zero interest with a nominal fee applied to each installment payment.
In our 2020 baseline study, Lending Insights: If You Build It, They Will Borrow, we described for consumers the concept of a credit card with a flex loan option. When asked about their use of or interest to use a card with this feature, nearly half of millennials (45 percent) indicated they were very or extremely interested in a flex loan option. Another 7 percent of millennials indicated they already had a card that offered this type of feature.
The appeal of a flex loan credit card feature transcends household income. Looking at the Raddon Consumer Segments, which groups U.S. households into one of six segments based on their age and income, a credit card with a flex loan option appeals to both lower-income and higher-income consumers. Among the younger, lower-income Fee Driven segment, 42 percent of households are very or extremely interested in a credit card with a flex loan option. Younger, higher-income Credit Driven households show even greater interest in a flex loan option, with 47 percent very or extremely interested.
Even upscale households making over $125,000 per year with a head of household 35 years of age or older show some affinity for a flexible loan option through their credit card. For this segment, one in five (20 percent) are extremely interested in this feature, comparable with Fee Driven (21 percent), Credit Driven (22 percent) and middle market (21 percent) households.
While it may seem counterintuitive for card issuers to compete against themselves on price and sacrifice margin in a low-rate environment, not responding to the competitive pressures of buy now, pay later solutions carries real risk for financial institutions: losing grip on cardholder relationships, surrendering interchange income and sitting on the sidelines of a dynamic small-dollar loan market. Self-service for cardholders includes enabling them to access their lines in different ways and with customized repayment terms. Selling and funding these loans costs nothing more than sending a targeted promo rate offer that is accepted.
Beyond just viewing credit cards as higher-interest lines of credit that may or may not offer rewards, banks and credit unions need to reimagine their offerings as dynamic vehicles for dispersing small-dollar loans. Financial institutions that fail to buy into flexible credit card lending now may find themselves paying for it later.
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