August 2023

The field of players in the “Buy Now Pay Later” service, or BNPL continue to grow. This year has seen the addition of Apple into the mix with their “Apple Pay Later” offering. Apple joins a growing field of payment providers that are offering the “installment loan” solution to purchases.

Installment loans are the age-old method of “paying later.” Most of the early installment loans were retailer driven. You wanted to buy something buy couldn’t afford it, the retailer would book the sale and take your down payment and then bill you for the difference. It might be a 12 or 24 month schedule with interest payments included.

New “No Interest” Payment Programs

These BNPL loans are now referred to as point-of-sale financing.

Buy it now, but pay it later. And, without any interest payments. This sure seems like a free lunch. However, if you miss a payment there often is a large late fee for some providers. In the case of Apple Pay Later, if you miss a payment your future purchases are prohibited.

Still, many are signing on to the service. It’s estimated that today, there are in excess of $100 Billion in annual loans and growing.

Younger Consumers are Using BNPL

According to statistics from Cornerstone Advisors, the usage of BNPL skews younger, with the largest segment being Millennials. Currently, 41% of Millennials are using the service:

Gen Z (21-25) 36%
Millennials (26-40) 41%
Gen X (41-55) 30%
Boomers (56-75) 18%

With so many younger consumers using the service, it’s critical to maintain a retention strategy to avoid losing these relationships.

What Can You Do to Compete?

Cody Banks from PSCU explained the challenge this way, “Institutions should package BNPL services in a way that promotes responsible use AND aligns with the institution’s vision.”

Today, you can partner with a provider to offer similar services to remain relevant in all categories of payment/lending services. But this isn’t a winning strategy on its own. You must also leverage the other advantages that your institution brings to the relationship.

Leverage BNPL to grow the Complete Relationship

Offering a BNPL is just one leg of the service stool. Like any tool that facilitates spending, it can be misused. For many it can lead to unintended consequences…like spending more than you earn.

Instead, resolve to be a proactive resource with financial wellness initiatives and products that feature low fees and low interest. Actively reach out to the younger segments to help them build good credit habits with a starter credit card, or offer a balance transfer from a higher rate card to yours.

Because these are smaller balances and transactions, this strategy won’t drive short-term profits. However, it will build a deeper relationship and a meaningful access to these consumers as they grow and evolve.

The economy keeps chugging along despite the predictions from seemingly everyone. Although interest rates have increased, all signs are showing that the economy is resilient. But things aren’t exactly what they seem. It depends on where you look.

There are areas of growing consumer risk.

Credit Card Debt is Climbing

A recent article from CBS News reports the following:

“More Americans are racking up credit card debt as inflation pushes up the cost of food, utilities and other staples.” And, “60% of credit card holders have been carrying balances on their cards for at least a year, up 10% from 2021.”

“59% of Americans who earn less than $50,000 a year carry a credit card balance from month to month,” the reporting notes. “The percentage drops slightly to 49% for those who earn between $50,000 and $80,000 and dips again to 46% for people making $80,000 to $100,000 a year.”

Most people don’t want to compromise their lifestyle choices when they are coming up short during these inflationary times. So, they are making up the difference with credit card spending.

And with some of today’s credit card rates hovering around 25%, it doesn’t take long to rack up massive debt.

The Real Cost of Consumer Debt

Making excessive interest payments is not a healthy practice. The credit card trap relies on those that get into a terrible habit of running up balances, resorting to the minimum balance payment, and never paying off the principal. Once you arrive at the cycle, it’s almost impossible to break.

And, when someone does default, everybody else pays for it through higher rates and fees.

Repackaging Loans and Educating Consumers

Before things get worse, now is that time to reach out to those account holders in need. You can pro-actively move those high balance accounts into lower priced options, such as home equity loans. But just as important as solving that initial problem, you can augment this effort with some financial education to help your users from becoming a statistic.

Tools that can help you focus their efforts on sound financial management include:

• Webinars covering the ABCs of household finances

• Educational web pages sharing the true cost of financial decisions

• Financial planning brochures with worksheets and budgeting tools

• Individual counseling

While many of these tools have been in existence for years, often people don’t notice their availability or their need until they are beginning to face financial discomfort. And that becomes the time that you can help them plot a new trajectory for their life.

Help them now…and forever.

Last week we discussed the impact of the Fed’s move on pricing strategy. We also started with the assumption that organizations are likely in the latter stages of dealing with this dilemma.

We learned that we (as individuals and organizations), go through several phases when a change (or major life event) occurs:

• Shock – We aren’t ready for the change; it’s a surprise.
• Fear – We are now afraid of what this may mean to our world; we are scared.
• Acceptance – We’ve come to accept that now this new set of conditions is going to remain
• Transformation – Now that we have accepted these changes, we have to adjust our perspective to fit this new reality.

Everybody goes through these phases at different speeds. And so does an organization.

I believe that most organizations have gone through the acceptance phase but are still struggling with the transformation stage. But this is exactly where we need to be heading – to explore a new way of pricing that is more dynamic than what we have historically relied upon.

In a recent article in Financial Brand, they discussed key strategies to optimize your pricing strategy in these times. It’s worth sharing:

Savvy financial institutions around the world are experimenting with unconventional inputs to create pricing models that allow them to stand out in their market and appeal to the customers they want to serve.

Here are just a few examples:

• In the United States, a midsize credit union rewards long-term customers with more favorable loan and deposit pricing. Customer loyalty creates value for the credit union, and giving special rates to these individuals strengthens the overall relationship.
• In Europe, a large retail bank calculates a relationship score by evaluating assets and liabilities across multiple customer accounts (retail, wealth, business, etc.). The resulting “value score” is used as a pricing attribute when they’re creating a rate sheet. We’ve also seen these scores used to impact fee waivers and cash back rewards.
• In the U.K., a large commercial bank incorporates climate data into how it prices loans secured by real estate. So, for example, if a property is located in a floodplain, the loan would be priced to reflect the increased risk of operating a business in that location.

By moving away from one-size-fits-all pricing models, these financial institutions are capturing business that works well for them at a price they — and their customers — find attractive.

Now these ideas may not be exactly what you are looking for. However, the idea is not to necessarily copy somebody else’s plan, but to create your own.

Coming out of this most recent season shows everyone how inflexible and obsolete our current pricing methodologies are. There is room for improvement.

Can you use this as a backdrop to building a new approach for your organization? Now’s the time.

Thanks for joining me today!

Psychologist have tried to help us make sense of the way we deal with change. There are many different models of thought. One popular philosophy posits that we go through several phases when a change (or major life event) occurs:

• Shock – We aren’t ready for the change; it’s a surprise.
• Fear – We are now afraid of what this may mean to our world; we are scared.
• Acceptance – We’ve come to accept that now this new set of conditions is going to remain.
• Transformation – Now that we have accepted these changes, we have to adjust our perspective to fit this new reality.

Everybody goes through these phases at different speeds. And so does an organization.

Organization Changes in Response to Industry Changes and Pricing

The past 12 months seem to be one of adjustment and transition. Starting last year, the Fed began moving up the interest rate. At first it was a shock. There were small increases where there hadn’t been any for years. It was still too early to understand. But then the spigot opened, and the Fed continued to increase rates to a level not seen in years.

Fear creeped in and most institutions early on started to pull back promotional programs. The worry was of the unknown – were these rates going to continue going up, level off, or go down? Will we be competitive? Can we take some extra profit on the deposits we are keeping at these very low rates, or do we ride the rates up with the market and increase our market share?

Or we do nothing.

Now What?

Today, I believe much of the industry is in the acceptance phase. There is an understanding of what is happening, and the short-term effect. Most institutions have adjusted rates to meet the new levels. But there still seems to be a “pulling back” and a relaxation on outbound marketing and promotion.

Without marketing, the organization will shrink and lose potential share. We have been playing defense. It’s now time to go on the offense.

Transformation – Now is the Time.

It’s time to get your organization out of the acceptance phase and into the transformation phase. Embrace a forward-facing look.

What does transformation look like to you? It could be many of the following:

• Adjusting pricing in line with new realities
• Building new products and categories that reflect current pricing and market demand
• Adjustment of staff focus to line up with changing consumer needs and new realities
• Add/subtraction of staff/personnel in conjunction with changes in workload and overall demand
• Protecting your market share with confident advertising messaging and aspirational positioning

Until you get into the transformation zone and move forward, everything will still feel like a crisis.

The biggest danger is being comfortable staying where you are (in the acceptance zone), “waiting to see what happens next.” Or, hoping things will go back to the way it was. It never does.

In the meantime, others may be eating your lunch.