Card issuers’ new focus on installment loans misses the point

Major credit card issuers, including JPMorgan Chase and Citigroup, have recently added installment loan features to their cards as companies like Walmart have entered the scene with point-of-sale loans.

A prudent but short-sighted strategy.

As commerce and financial services digitize, the opportunities to merge the two in new and seamless ways are increasing. This puts banks in an interesting position where they must consider whether to retain sole ownership of the customer relationship through rigidly defined product categories, such as credit cards, or integrate their products and services into experiences. non-banking platforms and applications.

It’s increasingly important to weigh these options as major partnerships emerge, such as Walmart’s recent deal with a fintech company, Affirm, to offer point-of-sale loans. And in light of the growing popularity of online personal loans which are often used to refinance revolving debt.

In response, Chase and Citi recently introduced installment loan features into their existing credit card products, similar to what American Express introduced in 2017. The idea is to give cardholders the ability to convert large purchases into fixed-fee payment plans, or allow them to borrow money from existing lines of credit and pay it back in fixed installments.

Some would argue that these features make issuers’ products safer because they give consumers more options for managing their debts. But focusing on securing credit cards misses the larger, more critical point: credit cards are a means to an end, not an end in themselves.

Consumers don’t ask for a credit card just for the sake of having one. They get credit cards to help buy things that really bring joy, like a new TV, refinished hardwood floors, or a family vacation.

Some bank executives are beginning to recognize this shift in mentality.

“Customers aren’t waking up to the bank, they’re waking up to live their lives, and banking needs to be much simpler and easier than it always has been,” said Tim Welsh, vice president. consumer banking at US Bank, in a recent American. Banker’s item.

Gavin Michael, Citi’s chief technology officer in the global banking division, agreed, saying that “customers think about banking while doing other things, like shopping, making travel plans. … The bank has a very natural role to play in these kinds of digital environments, rather than artificially driving them to Citi-owned property.

According to research by McKinsey & Co., nearly 90% of consumer financial services purchasing decisions are based on shopping or research processes, not past relationships or brand loyalty. Although banking marketers may wish otherwise, the reality is that consumer interest in their products and services exists almost entirely in the context of non-banking activities.

With this in mind, there are a few key areas that banks will need to improve, both in terms of skills and capabilities, in order to thrive in the era of “integrated banking”.

First, banks will need to adopt a more flexible and agile technology infrastructure. The era of monolithic enterprise software systems is coming to an end.

Banks will need to embrace APIs and microservices as they integrate their products and services into a diverse ecosystem of non-banking platforms and applications. Equally critical, banks must place more control directly in the hands of business users and risk analysts, and refocus IT resources on innovation rather than maintenance.

Second, banks need to invest significantly in business development – ​​through partnerships, mergers and acquisitions, and startup incubators – to ensure they can aggressively and opportunistically secure the best spots. integration within an ever-changing ecosystem. Competing for the occasional cobrand card wallet will seem like child’s play in comparison.

Finally, a bank’s ability to retain some level of ownership of the overall customer relationship will depend on its ability to provide customers with tailored advice and guidance to improve their financial health. Advice on whether the customer should buy that new TV or how a large purchase would impact their other financial goals, for example.

This core competency will rely less on human advisors and more on analytics and artificial intelligence. And this change will be accelerated by the mountains of data generated by the interactions that customers have with these non-banking platforms and applications.

Credit card issuers introducing installment payment options into their existing products are taking a step in the right direction. However, they must also prepare for a world without credit cards, or risk missing the forest for the trees.

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