Paymentology’s Martin Heraghty explores how the lending landscape is changing and what this means for consumers.
While central banks are using interest rate hikes to tackle inflation, it is retail banks and fintech service providers at the forefront of addressing the painful cost-of-living crisis affecting millions across the UK.
The pain is sharp: according to the latest data from the Office of Budget Responsibility (OBR), there was a significant decrease in RHDI (a gauge of living standards) by 4.3% during 2022-23, marking the most substantial decline since the beginning of ONS records.
This makes the fresh wave of innovative credit products on offer more relevant than ever, making it timely to examine the future of Credit as a Service (CaaS).
This year, we’re already seeing fintechs doubling down on advancing payment products that support consumers through new lending solutions, such as the most recent launch of Apple Pay Later. Research forecasts that this type of credit could deliver a revenue increase of between 5% and 15% through higher acceptance rates, lower cost of acquisition, and better customer experience.
More alternative solutions, such as combining revolving credit accounts for day-to-day spending and instalment accounts to spread the cost of larger purchases, will provide individuals with innovative products to help them better manage their finances.
Another recent offering in the burgeoning buy-now-pay-later (BNPL) space is Monzo Flex, which enables the consumer to spread the cost of purchases over several instalments, interest-free, or over six or twelve instalments at 24% APR representative (variable). Consumers can use it online and in-store to pay for, in Monzo’s words: “Pretty much anything.”
The combo card that is gaining popularity too from various players, also offers the convenience of a debit card with the added benefit of a credit balance, making it an attractive option for consumers who want to have both types of accounts in one.
Meanwhile, long-standing players are also stepping up their game. Mastercard and Visa Instalment Payment Services means cardholders can break the cost of big purchases into bite-size monthly chunks, heralding a new era of flexible credit as the norm.
As part of the services, an embedded calculation engine provides consumers with an instalment amount at the terminal or during online checkout, and with flexible fee calculations, the fee can be added before or after APR is calculated.
The fact that industry giants are prioritising these sorts of offerings is a signal that the future could result in blurred lines between loans and credit cards, making larger purchases possible over time. Customers will have access to financial services and products that are more convenient, transparent, and personalised than ever before.
The use of artificial intelligence and machine learning algorithms will enable lenders to track consumer behaviour, analyse data in real time, and adjust their offerings accordingly. If a customer is experiencing financial difficulties, the lending system may automatically adjust the repayment plan or offer alternative financing solutions.
The hot demand for modern credit card processing and innovative credit products, such as the combo card that links a credit balance to a debit card, is increasing in the issuing market due to a couple of factors.
Firstly, banks are eager to upgrade their credit card platforms, as many require modernisation. Secondly, fintech companies are searching for new and more profitable products as traditional debit cards alone may not offer high enough profit margins.
This demand for modernisation and innovation in the credit industry is driven by the need to stay competitive and meet the changing demands of consumers. With technology evolving rapidly, banks and fintech companies must adapt quickly to offer convenient and efficient credit products that meet the expectations of customers today.
By investing in modern credit card processing and developing unique credit products, financial institutions can attract and retain customers while also improving their bottom line.
Hyper-personalisation is a benefit for the consumer as it gives them a payment method that is easy to use and enables better budget control – as well as fitting their most pressing needs. A person who needs to finance a home renovation project may require a different type of credit to someone who needs to purchase a new car.
An Accenture study has also shown that 91% of consumers are more likely to purchase when they are provided with relevant offers and recommendations.
However, along with these new opportunities comes new responsibilities for lenders. In this new lending landscape, customers interact with a fintech lending offering that seamlessly integrates into their daily lives.
This creates a more convenient and efficient borrowing experience. Yet when this process becomes too smooth, there is a danger that customers may go too far in accessing credit they can then no longer repay.
The Consumer Financial Protection Bureau (CFPB) showed that between 2019 and 2021, BNPL loans originated in the US by the top five lenders increased by 970%, with the dollar volume of such loans rising from $2 billion to $24.2 billion.
Two-thirds of consumers now see BNPL schemes as ‘financially risky’ as they can cause them to overspend and shepherd them into a debt spiral.
It’s paramount that responsible lending is embedded into the future of CaaS: it is not only morally the best way to proceed, but also ensures longevity and credibility in the decades to come. It can help prevent financial crises on a collective level and protects consumers from unsustainable debt burdens.
Overall, the shift towards digital lending platforms seamlessly integrating into customers’ daily lives represents a significant change in the lending landscape. It offers greater convenience, efficiency, and personalisation, which can benefit both customers and lending platforms. But it also offers new opportunities for forward-thinking firms to lend in a responsible and sustainable manner.
Martin Heraghty is regional director, Europe at Paymentology.
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