Citigroup is making progress with installment lending, an option that banks have been slow to embrace while fintechs have grown the market.
Citi Pay Installment Loans was launched in late 2023 as part of the City Pay menu that also includes City Pay credit,. City Pay has attracted 195 merchants in the U.S., the product's initial market. Sales have expanded 20% per month, with early adopters including PODS, Hublit and LGC.
The bank will need to dramatically add to that network as it faces other financial institutions that have warmed to BNPL, and firms such as Klarna, Affirm and Afterpay that have gotten a headstart.
Citi is positioning City Pay, Installments and its suite of related products as one of several options at the point of sale. That's a reversal of sorts from BNPL fintechs that are diversifying by adding financial services to installments, such as savings accounts and a broader range of credit options.
The bank is betting that its focus on credit decisioning, a pipeline of added products in the coming months, and existing relationships with consumers and merchants through Citi Retail Services will help it compete.
"I feel we're well-positioned. We have a lot of data on our customers and do a lot of analysis that can provide insights to merchants," said Kartik Mani, head of Citi Retail Services. The rising popularity of BNPL in the U.S. has banks and the card networks adding installment options, even as the product often competes with bank-issued credit cards. Citizens Bank, Synchrony and Bread Financial all offer white-label installment loan products, and U.S. Bank offers a BNPL option through its Elavon merchant services subsidiary.
Network programming
Citi is relying on its existing network of about 86 million accounts through its Citi Retail Services to provide scale for installment lending, and regulatory and economic pressure BNPL lenders have faced due to concerns over consumers unsafely accumulating debt.
"We have worked with a lot of retail partners for decades, and they'll want to work with a trusted brand that is there for them throughout the customer cycle," Mani said.
Building a network of merchants is key to building a BNPL business, since payment analysts have said consumers care more about the merchants offering installment plans than the actual BNPL provider. Klarna, for example, has divested its Checkout product and forged partnerships with payment companies such as Stripe, Worldpay, Adyen and other payment processors, enabling Klarna to add more than 100,000 new retailers in the past year. Klarna has added an updated Visa card, as has Affirm and Afterpay. Amazon, which has a partnership with Affirm, last week boosted its BNPL game by acquiring Axio, a Bengaluru, India-based fintech that offers installment lending and related technology.
"Of course we're looking and keeping an eye on what the fintech sector is doing," Mani said. "We think we have a lot of digital-first products that we can transport over to Citi Retail Services."
One advantage that Citi and other big banks have over fintechs is that their brand is more widely recognized and trusted, particularly for people who don't have a lot of experience with BNPL providers, according to Aaron McPherson, principal at AFM Consulting. In Citi Pay's case, it has pursued a strategy of partnering with fintechs — specifically, ChargeAfter, FreedomPay and Shopify. "We have seen Affirm's partnership with Apple to replace Apple Pay Later to extend its reach, and I think we will see more of these deals as BNPL providers work to enlarge their acceptance points," McPherson said.
One challenge is the sheer proliferation of BNPL providers, and the risk that consumers may overextend themselves by taking on too many BNPL loans from different providers, who can't see each other's exposures, McPherson said, noting Citi Pay does a credit pull before approving a line of credit, and reports to the credit bureaus, so this reduces its risk at the expense of losing some customers who may have a credit freeze in place.
"As more BNPL providers do this, the overall risk should go down, and it will become more difficult to get financing, which is probably a good thing," McPherson said.
What people want
Citi is also addressing a trend of consumers seeking alternatives to revolving debt. Forty-seven percent of consumers say buy now/pay later lending enabled them to make a purchase, according to research from Arizent, American Banker's publisher, which notes 60% of Gen Z and 66% of millennial consumers are likely to use BNPL.
Arizent also reports BNPL is one of the biggest reasons consumers are shifting away from traditional banks to fintechs.
Citi's own research found 82% of Americans say pay-over-time products have benefits, 49% of Americans have used a pay-over-time product to make a purchase, and 68% of American consumers say not having flexible payment options is a deal breaker.
"The consumer trends are well known," Mani said. "People want to choose how they pay." The banks are late to the game, and BNPL focused fintechs have grabbed the first mover advantage, said Aaron Press, research director of worldwide payment strategies for IDC.
"This not only makes it hard to acquire consumer customers, but also to get space on increasingly crowded merchant payment pages. And for many consumers, association with a big bank can be a liability," Press said.
Citi Pay appears to be an interesting experiment, Press said, noting it's a hybrid with elements of both traditional and BNPL models.
"It offers a BNPL type of experience but is doing a hard credit check and offering an open line of credit. It's also similar to private label programs, without requiring involvement of the networks."
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