Don’t Get Swamped by the POS Credit Wave

Fast, frictionless credit at the point of purchase, delivered via mobile apps, threatens to sideline banks. It won’t—if they look upon new fintechs as friends rather than foes.

We increasingly use smart phones to make contactless payments and apps to collect rewards. And now, we use new and fast-growing short-term credit finance at the point of sale—and not always for big-ticket items.

Indeed, payment technology has diversified into frictionless credit provision at the point of sale. Retailers that realized this early on and entered into technology partnerships are already reaping the rewards. Now, with card issuers able to offer more-attractive payment-installment plans for customers to use at checkout, merchants have a golden opportunity to appeal to new prospects, regain lost customer relationships, and benefit from increased loyalty.

Commonalities

Imagine a cardholder wants to buy a big-screen TV ahead of the Super Bowl but can’t make a full payment right away. The customer wants to make the best financial decision, and he wants it to be quick and easy. So what can he do?

Option 1: He considers using a store-brand credit card. Store-brand credit cards are a convenient option, and usually have better approval rates than general-purpose credit cards. That’s despite the fact that these cards can come with a high annual percentage rate, less-enticing rewards, and more complex terms and conditions than bank-issued credit cards.

Option 2: Alternatively, the customer can use short-term credit financing right at the point of sale. These plans are quick to apply for, mostly frictionless, and offer a wide range of immediate solutions, including one-off finance programs, delayed payments, and installments.

Outside the U.S., third-party technology providers are rapidly taking off to help retailers offer payment plans. Sweden-based Klarna, which has been operating in the United States now for several years, is one of the most well-known, serving some 60 million customers. Globally, PayPal Credit (formerly BillMeLater) is also building its fan base.

Two things are common to both of these scenarios. First, the customer gets a fast, convenient experience that will induce him to return and use the service again at other places, maybe for an unexpected vet bill or maybe just for a big grocery bill. Second, customer loyalty grows.

But notice that there’s one big downside that’s common to both of these scenarios. Recall that the customer is also a bank card user. In both of these scenarios, the issuing bank loses out on customer relationships and, in the long term, on transactions, too. But there is an ideal opportunity for card-issuing banks and credit unions to muscle in on the act.

Differentiator

When consumers choose a finance option, they want to know several things: how much money they owe, when they will be paying towards the purchase, and a clear timeline of when the plan finishes. They also don’t want to be worrying about their monthly cash flow.

Bank-driven payment-installment plans can give them this information, and some issuing banks are now coming around to offering this service at the point of sale. In fact, some have started to realize that the way to compete with retailers and digital-banking challengers is to offer installments on specific purchases as part of their mobile services.

In fact, when financial institutions offer payment-installment plans through their mobile-banking app, they give customers a more complete view of their finances as well as a more interactive experience. For example, these services can allow customers to receive a push notification when a scheduled payment has been successful or when a purchase is eligible for installments. These in-app installment notifications are the issuing bank’s way of thanking the customer for using their credit card instead of a store-branded one. It also recognizes making a purchase decision is not always easy and offers a simple and stress-free solution right away.

With mobile-based installment features, customers can decide more than just whether they want to finance a purchase. They can opt for different time and installment specifications.

That said, it’s not just the customers who get to pick between options.

Here’s what I mean. For banks to offer a sophisticated and personalized service, they themselves must be able to set the parameters of their installment programs with a large degree of freedom. Most banks don’t have large IT departments that can design these services around the customer experience. But some third-party technology providers specialize in this.

These integrators can configure installment plans so that they can be offered at specific retailers or retailer types—both physical and online—over any spending amount or time period, while allowing issuers to specify eligible customer types, card types, and even interest rates. Outsourcing to fintechs is a viable option to gain a fresh perspective into customer needs in the form of app user reports and more targeted customer insight, without the IT burden.

Make no mistake. Customers are looking for convenient and frictionless payment experiences and will increasingly choose to spend their money where the option to spread the cost of a purchase is available in-store. For issuing banks, this means offering payment-installment plans can be the differentiator between gaining a customer and losing one.

Being idle in this digital age can cost financial institutions revenue and customer relationships. But as more fintech providers step up to help them, not hinder them, mobile-based payment solutions are starting to fill the gap. Although slow to catch up, issuing banks are well-placed within the payments ecosystem to capitalize on short-term credit provision. In fact, they can be the biggest winners.

—Mehmet Sezgin is chief executive and founder of myGini Inc., San Francisco.