U.S. credit card market is waiting for a new entrant willing to shake up the status quo. Just like AT&T, which started a no fee credit card in 1990 and created the new norm of no annual fee. If you don’t believe me, just look at the data.
In 2020, US credit card balance dropped by 9% (according to Experian ). Interestingly, the decrease in total balance is pretty much same (~11-12%) across all age groups, but rate of pay down increased as age decreased. Meaning Millennials lowered their credit card utilization more than Generation X and Gen. Xers paid off more than Baby Boomers. Surprisingly, this decline trend applies to both retail and bank credit cards, while most other categories of debt including personal loans increased in 2020.
What if the missing credit card debt has actually showed up as personal loan and Buy Now Pay Later (BNPL- shorter duration loans with weekly or bi weekly payment)? A survey by Ascent shows that 30% of Buy Now Pay Later customers trust their BNPL providers more than credit card companies. The same survey also shows the BNPL usage has grown almost 50% since July 2020, in less than one year.
So, what does personal loan and BNPL have that make them more attractive to consumers than credit card?
1. Transparency
Both personal loans and BNPL provide customers upfront estimate of monthly payment. Compare this with the opaque nature of credit card monthly payment and cost of credit calculation.
2. No interest loans
Most BNPL loans are at no cost to consumers unless they are late in payment. These loans are also set up with automatic payment at the time of loan application.
Most of the personal loans are with APR between 0% and 30%. But the 0% interest rate does not ratchet up to something higher after 6 or 12 months. Retail credit cards’ 0% offers are often on accrual basis where consumers could end up paying interest from day 1 if balance is not paid off within promotional time period.
3. Consumer control
Digital personal loans and BNPL give consumers ability to choose which transactions to pay over time. In most credit cards, once a cardholder does not pay off the entire balance at the end of the month, every subsequent transaction automatically starts accruing interest from purchase date.
What if we reimagine credit card in a totally different way?
Credit card could be a series of installment loans attached to a line of credit (LOC) and a payment instrument for purchase at point of sale.
The LOC can be separated into 2 or 3 buckets designated for different usage.
One of the buckets will be for installment loans- all transactions over $XX will be automatically sent there with default payment term being Y% APR and Z months term.
A second bucket will be for smaller transactions, which the consumer will have the choice to pay off at the end of the month. If sum of monthly smaller transactions is >$XX, then the consumer will have the choice to convert it to an installment loan and move to the installment bucket.
A third and optional bucket could be for smaller transactions with weekly or bi weekly payment schedule and not to exceed 12 weeks in duration. Essentially this is issuer’s own BNPL offer to credit card customers.
Entire introductory offer game needs to go. If true 0% is not possible, then don’t offer it.
Cash advance can be similar to digital personal loan, an installment loan taken from credit card LOC and immediately disbursed to debit card or bank account.
Consumers should have the opportunity and incentive (like lower APR) to set up autopay at application. Goal is to help consumers avoid late fee.
Balance transfer is OK but without the gimmicky 0% APR that increases later. Use a service like PLAID to help customer select which card balance to convert into a personal loan in real time.
Make everything digital and manageable via mobile app.
Sure, point toting, million milers love their miles card. Affluent customers love their cash back card. But issuers' profit mostly come from the people paying interest on revolving balances. More and more they are saying they want transparent, convenient financing options that give them a sense of control and fewer surprises. With cost of capital being all time low and credit card balance declining, it’s time for banks to throw out the old business model and embrace a new future.