FuturePay CEO Tim Harris recently outlined the pros and cons of BNPL and credit cards–and showed how Digital Revolving Credit offers many of the benefits of these methods with fewer drawbacks.
The goal of any e-commerce merchant when providing a payment method is to make online transactions as friction-free and convenient as possible for customers. This increases the average order value and reduces cart abandonment. Merchants have a range of choices when selecting payment options, including newer financing models like Buy Now, Pay Later (BNPL), and traditional methods like credit cards. Each of these has advantages and drawbacks.
In addition to these popular payment options, Digital Revolving Credit has emerged as an attractive alternative for e-commerce merchants and their customers. This method blends many of the advantages of BNPL solutions and conventional credit cards while avoiding some of their pitfalls. Before we define digital revolving credit, let’s look at the pros and cons of each payment method.
Buy Now, Pay Later as a Short-Term Loan
BNPL programs are primarily structured as installment-based short-term loans, many of which entice shoppers with zero interest rates to attract customers. On the positive side, BNPL solutions are purpose-built for e-commerce, and offer instant financing in the shopping cart with very little friction for individual transactions.
Since BNPL vendors offer short-term loans, they generally don’t do much credit screening of applicants, if any at all. This has led to high default rates and may explain why the financial performance of some of the larger BNPL vendors has been sub-optimal.
In addition, regulators have become increasingly critical of the ethics behind offering “free” financing to those consumers who may sign up for more debt than they can manage. This regulatory pressure combined with the challenging economics of offering zero or low-interest financing has caused some to question the long-term sustainability of this business model.
Conventional and Private Label Store Cards – Credit for Brick-and-Mortar
Now let’s look at the more traditional credit card scheme. On the plus side, both credit cards and private label store cards extend long-term revolving credit to consumers. Credit card companies rigorously screen applicants and underwrite only those that have a proven credit history and estimated debt to income (DTI) ratio. The revolving credit line can be used and re-used without having to reapply.
Unlike BNPL installment loans which finance individual transactions separately, a revolving credit account combines all transactions into a consolidated line with one monthly balance and payment plan.
On the “con” side, credit cards were designed for offline retail environments and are not optimized for online transactions. A conventional credit card application often takes hours or days for approval, unlike the instant approval of online BNPL offerings. And when it comes to online purchases, the requirement to enter a credit card number and CV code for each transaction is cumbersome. It’s particularly a turn-off for younger consumers who are used to instant self-service. Private store cards share many attributes with traditional credit cards but have the limitation that they can only be used with the merchants who offer them.
In the end, neither installment-based BNPL loans nor traditional credit and private label store cards provide the optimum online purchase flexibility that discerning consumers demand.
Introducing Digital Revolving Credit: The Best of Both Worlds
Digital Revolving Credit shares many of the attractive qualities of BNPL, including convenient and fast application right from the e-commerce shopping cart. Completing transactions is also quick and friction-free. Like BNPL, Digital Revolving Credit is purpose-built for e-commerce use.
One major advantage of Digital Revolving Credit is that it is not constrained by a fixed payment schedule. Consumers can structure their payment schedule to meet individual budgets and needs, which makes it easier to consistently make payments. In addition, since they provide long-term financing for multiple purchases over a lifetime, Digital Revolving Credit providers must adhere to strict financial regulations when it comes to underwriting and signing up consumers (that includes credit checks).
Creating a Digital “Tab”
Here’s another key benefit of Digital Revolving Credit: an account can be opened once and used again and again indefinitely, as long as the customer remains in good standing. That’s attractive to merchants who sell products that lend themselves to repeat purchases, or even subscriptions.
In other words, consumers can view Digital Revolving Credit as enabling consumers to put purchases on a digital version of a “tab.” Monthly payments on the tab are made flexibly according to the purchaser’s budgetary needs, and additional purchases can be added to the tab as long as the credit limit is not exceeded. The consumer doesn’t have to reapply for additional financing every time they want to make additional purchases. And since digital revolving credit accounts are private, they can provide a credit line for discretionary purchases separate from the family credit card accounts.
Increasing Customer Lifetime Value
Compared to typical installment-based BNPL loans, Digital Revolving Credit allows merchants to form long-term relationships with their customers, providing an incentive for shoppers to continue to use their credit line on a recurring basis. Rather than “Buy Now Pay Later,” this method could be more aptly described as “Buy Often Pay Flexibly.” This approach uniquely maximizes a golden metric of most e-commerce merchants: increased customer lifetime value (LTV). This measures the total potential amount of business that a merchant can expect from an individual consumer over the lifetime of the relationship. Digital Revolving Credit can create much higher LTV than short-term BNPL installment loans can.
Digital Revolving Credit provides both the ease-of-use and modern delivery of BNPL (purpose-built for e-commerce) with the traditional revolving credit model that credit card companies offer. It’s a flexible solution that enhances the lifetime relationship between merchants and their customers.
Tim Harris is Chief Executive Officer of FuturePay Inc., creators of the MyTab™ digital revolving credit solution. Tim has three decades of experience at enterprise software and fintech companies including RSA, Siebel, Intuit, and IBM.