Card issuers’ new focus on installment lending misses the point

Large credit card issuers including JPMorgan Chase and Citigroup have recently tacked on installment lending features to their cards as companies like Walmart have entered the scene with point-of-sale lending.

A prudent strategy, but shortsighted.

As commerce and financial services both become digitized, the opportunities to blend the two together in new and seamless ways multiplies. This puts banks in an interesting position where they must determine whether to retain sole ownership of the customer relationship through rigidly defined product categories, like credit cards, or to embed their products and services in the experiences of nonbank platforms and applications.

It’s increasingly important to weigh these options as major partnerships emerge, such as Walmart’s recent agreement with a fintech company, Affirm, to offer POS lending. And in light of the surging popularity of online personal loans that are often used to refinance revolving debt.

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

Some would argue such features make issuers’ products safer because it gives consumers more options for managing their debts. But focusing on making credit cards safer misses the broader and more critical point: Credit cards are a means to an end, not an end in and of itself.

Consumers don’t apply for credit cards simply for the joy of having it. They get credit cards to facilitate the acquisition of things that actually bring joy, such as a new TV, refinished hardwood floors or a family vacation.

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

“Customers do not wake up to bank, they wake up to live their life, and banking needs to be much simpler and easier than it has historically been,” said Tim Welsh, vice chairman of consumer banking at U.S. Bank, in a recent American Banker article.

Gavin Michael, Citi’s head of technology within the global banking division, agreed, saying that “customers think about banking while doing other things, like shopping, making travel plans. ... There is a very natural role for the bank to play in those kinds of digital environments, rather than artificially driving them to a Citi-owned property.”

Nearly 90% of consumers’ financial services purchasing decisions are based on shopping or research processes and not on prior relationships or brand loyalty, according to a McKinsey & Co. study. While bank marketers might wish otherwise, the reality is that consumers’ interest in their products and services exists almost entirely in the context of nonbank activities.

With that in mind, there are a couple of key areas that banks will need to improve, both in competencies and capabilities, in order to thrive in the era of "embedded banking."

First, banks will need to embrace a more flexible, nimble technology infrastructure. The age of monolithic, enterprise software systems is coming to a close.

Banks will need to embrace APIs and microservices when weaving their products and services into a diverse ecosystem of nonbank platforms and apps. Just as critical, banks need to put more control directly in the hands of business users and risk analysts, and to refocus IT resources on innovation rather than maintenance.

Second, banks need to significantly invest in business development — through partnerships, mergers and acquisitions, and startup incubators — in order to ensure that they can aggressively and opportunistically secure the best integration points within a constantly evolving ecosystem. Competing for the occasional cobrand card portfolio will seem like child’s play by comparison.

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

This core competency will rely less on human advisers, and more on analytics and artificial intelligence. And this shift will be accelerated by the mountains of data generated by the interactions that customers have with these nonbank platforms and apps.

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