Payments Briefing: Consumers are increasingly turning to flexible payments to counter inflation
- This week, we look at how American consumers plan to use more flexible payments to be able to afford gifts for themselves and others this holiday season.
- We also discuss how businesses around the world are increasingly making digital payments, but are also facing growing instances of fraud.
For much of this year, American consumers have been feeling the pinch of rising interest rates and the climbing cost of goods. People living paycheck to paycheck, or with nonprime or subprime credit, are especially vulnerable to the effects of inflation. For many of these consumers, the ability to split payments and pay over time allows them to get the items that they need but may not be able to otherwise afford.
New research from lease-to-own payments provider Katapult finds that more than three-quarters (78%) of consumers with nonprime credit scores or lower say they would use a flexible payment option – such as BNPL or LTO – to purchase gifts for themselves and others this holiday season, if offered by the online or physical stores where they shop.
Despite historically high prices, almost a third of shoppers (32%) expect to spend more than last year on gifts this holiday season, according to the survey. And over half of consumers are more likely to shop with a merchant that offers flexible payment options, especially as many traditional lenders have tightened their lending criteria and increased interest rates.
“The holidays can be expensive even in rosier economic times, and that’s likely to be even more true this year with consumers paying more for less due to higher prices,” Orlando Zayas, CEO of Katapult, told Tearsheet. “Without the flexibility to split larger payments over time, many nonprime shoppers will have difficulty affording items such as video game consoles, laptops, TVs, and other popular gifts for themselves or others.”
Younger consumers are particularly eager to use alternative payment solutions, and many of them specifically seek out retailers that offer these options. 60% of Gen Z and millennials say they are more likely to shop from a merchant that offers flexible payment options, compared to 45% of their Gen X and older counterparts.
“We’ve found lease-to-own and other flexible payment options appeal to younger consumers since they are more likely to pick up on newer trends, less likely to have established credit, warier of incurring credit card debt, and often struggle with larger purchases since they have yet to hit their prime earning years,” explained Zayas. “By offering flexible payment options, retailers can reach younger customers now and earn their loyalty for years to come."
So, what does this research tell us about how rising prices and interest rates influence consumers' use of different payment options?
Zayas says the findings illustrate that in times of economic uncertainty, consumers – particularly those with nonprime credit scores – are more much likely to try flexible payment options to get the items they need. Nearly two out of three Americans (62%) say that currently, inflation is causing them to delay or skip purchasing big-ticket items. This likely explains why more than half of consumers say they are more likely to shop with a merchant that offers flexible payment options such as BNPL or LTO.
“Higher inflation is causing traditional lenders to tighten their lending criteria or increase interest rates, and without flexible payment options, a majority of Americans wouldn’t have the funds to obtain the goods they need,” said Zayas. “Alternative payment solutions that split payments over time enable consumers to stretch their dollars further when items across the board are more expensive and money is not going as far as it used to go.”
Of course, it's important to mention here that these alternative payment options may provide a temporary respite to consumers against high inflation, but repeated use of flexible payment methods like BNPL could potentially further weaken the financial health of nonprime consumers by leaving them with growing debt that they may be unable to pay off later.
It would be interesting to see whether lease-to-own – which has been touted by some as a “recession-proof” alternative to BNPL – gains more adoption as consumers continue to seek out flexible options to break up their purchases into manageable payments.
Businesses favor digital payments, but are wary of cybercrime and fraud
According to the World Bank, two-thirds of the world’s adult population is now making payments digitally. What’s more interesting is that adoption in developing economies has also grown consistently, claiming 57% of the global population using digital payments.
The pandemic is generally understood to have been a key driver for the penetration of digital payments. MIT Technology Review acknowledged that in a recent report produced with Visa, although adding that the growth in digital transactions has been followed closely by increasing instances of fraud.
The FBI reports that losses from cybercrime nearly doubled between 2019 and 2021, from $3.5 billion to $6.9 billion. However, the report also listed advancing cybersecurity as one of the key benefits of digital payments, alongside operational agility and customer data technology.
Businesses, especially consumer-facing ones, continue expanding into digital payments. The report found that while 36% of the respondents are just getting started with digital payments, around 43% expect to expand their offerings in the next 18 months. Moreover, around 37% are venturing into cross-border transactions, while 18% are dabbling in cryptocurrencies.
The reasons why businesses are adopting digital payments aren’t exactly in line with what the report views as their key benefits. The majority of respondents – mostly C-level executives from around the world – said they’re doing it to give customers more checkout options.
Around 70% of the respondents say they offer digital payments to improve customer experience, providing more payment options and helping them save time, while 48% say they help them improve operations. 37% intend to reduce processing costs, 36% to expand secure payment options, and 35% to personalize offers to customers.
Business leaders also listed a number of reasons that prevent them from adopting end-to-end digital transactions, among them the perception that doing so will increase their operational expenses. Even just the initial integration is a concern for 49% of the respondents. The idea is that in order to install digital payment mechanisms, firms would have to redo all of their systems, and such a task is daunting.
Another challenge associated with integrating digital payments was cited as building a secure processing network, by 24% of the respondents. With digital, the threat of cyberattacks is rampant, and the risks associated with that are costly.
So, cybersecurity threats were found to be the biggest challenge in expanding to digital payments, cited by around 59% of respondents. Businesses are hence prioritizing advanced security capabilities, trying different methods like digital tokens for enhanced authorizations, using biometric authorization, and deploying artificial intelligence. 42% of these businesses say that a reason for such security steps is simply that it’s important to their customers.
For smaller businesses, the report argues that inertia has a big role to play in slow adoption, saying companies need a compelling reason to change. The report then adds that data could be that reason.
Moving to digital means that information from every transaction within a business – whether it’s money coming in or flowing out – is stored. This data can be easily tracked and analyzed to understand a business’ cash flows better and make better financial decisions.
Digital payments are continuously growing, with ever more businesses looking for ways to implement them. As with any new technology that fundamentally changes business operations, digital payments also come with their own risks. However, as the industry matures, so will its ability to fight off those risks.
Highlights from our recent coverage
Power of Payments Ep. 16: Digital wallets, credit cards vs competitors, and Visa's interest in the creator economy
This week, we take a look at how digital wallets have performed in the US over the past year, and why credit cards are struggling to fight off competitors like BNPL and debit cards. We also discuss Visa’s latest move indicating its growing interest in the global creator economy.
LeafLink processes over $1 billion in wholesale cannabis payments
LeafLink, the biggest cannabis wholesale market in the world, has now powered transactions worth $1 billion through its cannabis payments solution. Around $5 billion worth of cannabis moves around on LeafLink’s global wholesale platform annually.
How Wise bridges the gaps for banks’ cross-border payments
Traditional banks have long taken center stage for cross-border payments, but new challenges in a digital-first world leave much to be desired. Ryan Zagone, Head of Americas at Wise for Banks, talks about how Wise is helping banks adapt to a post-pandemic world.
What we're reading
- Stripe takes steps to prune workforce (Forbes)
- JPMorgan Chase, taking a feature from fintech rivals, gives some customers early payday deposits (CNBC)
- PayPal debuts a new rewards program that combines Honey’s discounts with other ways to earn (TechCrunch)
- Chase's playbook to beat PayPal and Square in digital payments (The Financial Brand)
- Visa targets the creator economy with new tool set (Finextra)
- Brex lays off 11% of staff as part of restructuring (TechCrunch)
- Payments firm Airwallex raises $100 million, retains $5.5 billion valuation (Yahoo Finance)
- Mastercard to issue 'quantum resistant' contactless cards (Finextra)
- PayPal apologizes for threat of fines over ‘misinformation’ (PYMNTS)
- Global payments revenues bounce back (Finextra)