The Future Of Self-Service Borrowing / THE feature / CUToday.info

05/12/2021 07:40 pm

By Ray Birch

BROOKFIELD, Wis.—Borrowing is becoming much more about self-service, and credit unions better pay attention to the shift in consumer preference as it likely means considering new credit card options, according to one analyst.

Driving the evolution in preferences is the buy now pay later (BNP) services that have grown rapidly during the pandemic as consumers raise their level of online buying and use of online services in general, experts have stated.

“Buy now pay later represents the future of self-service borrowing. That is where this is all headed,” said Greg Ulankiewicz, senior research analyst performance analytics product manager at Raddon, a Fiserv company, about the rapid growth in BNPL.

In July 2020, The Ascent, a unit of the Motley Fool, surveyed 2,000 Americans about their buy now pay later habits. The company then followed that survey with another in March 2021, with the results showing an almost 50% growth in BNPL in less than a year.

Ulankiewicz emphasized mobile devices have led to the big change in consumers’ borrowing habits.

“Consumers now have the power in their hands to simply borrow in a self-service manner,” he explained.

Not only do consumers have greater convenience with BNPL—not having to apply for a small personal loan or go through a lengthy credit card application—they are typically borrowing at a lower rate than most credit cards, Ulankiewicz said.

“There is significant risk that these new buy now pay later solutions will start stealing the credit card relationships,” said Ulankiewicz. “If the member has the option to put money on a credit card at a 10%-plus interest rate and they don't have disciplined repayment terms around that, they're going to be much more hesitant to use that card versus a solution that's offering 0% or a low rate and locks in some fixed-discipline payment terms.”

Think About a Redesign

Greg Ulankiewicz

Ulankiewicz suggested it is time credit unions begin thinking about ways to redesign credit card offerings, or come up with new products, to better match the advantages afforded to consumers by BNPL.

“If consumers are hesitant to utilize that credit card line of credit and don't want to fall into the credit card trap, CUs need to come up with new solutions,” said Ulankiewicz, noting a “flex loan” could be the option—a loan that offers similar terms and conditions to BNPL.

It’s not only time to get moving to protect the credit card base, but also the stable of younger members.

Ulankiewicz explained that in a 2020 Raddon study, the company 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%) indicated they were very or extremely interested in a flex loan option,” Ulankiewicz said. “Another 7% of Millennials indicated they already had a card that offered this type of feature.”

Get Flexible

The appeal of a flex loan credit card feature transcends household income, Ulankiewicz said.

“Looking at 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,” said Ulankiewicz. “Among the younger, lower-income fee-driven segment, 42% 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% 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, he said.

“For this segment, one in five are extremely interested in this feature, comparable with fee driven (21%), credit driven (22%) and middle market (21%) households,” Ulankiewicz said.

The Real Risk

Ulankiewicz added that while it may seem counterintuitive for card issuers to compete against themselves on price and margin in an already low-rate, tight-margin environment, not responding to the competitive pressures of buy now pay later solutions carries real risk for financial institutions.

“Again, you risk losing your grip on cardholder relationships, surrendering interchange income and sitting on the sidelines of a dynamic small-dollar loan market,” he said. “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…Financial institutions that fail to buy into flexible credit card lending now may find themselves paying for it later.”

Related Resources

CUToday.info has related reporting on BNPL at the links below:

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