The goal of any e-commerce merchant in providing a payment method is to make online transactions as easy and convenient as possible for customers. This increases the average order value and reduces cart abandonment. Merchants have a variety of options 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 disadvantages.
In addition to these popular payment options, Digital Revolving Credit has become an attractive alternative for eCommerce merchants and their customers. This method combines many of the advantages of BNPL solutions and conventional credit cards while avoiding some of their drawbacks. Before defining 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 short-term installment loans, many of which lure buyers with zero interest rates to attract customers. On the plus side, BNPL solutions are designed specifically for e-commerce and offer instant financing in the shopping cart with very little friction for individual transactions.
Since BNPL providers offer short-term loans, they typically don’t do much, if any, credit screening of applicants. This has led to high default rates and may explain why the financial performance of some of the largest BNPL providers has been suboptimal.
In addition, regulators have become increasingly critical of the ethics behind offering “free” financing to consumers who can take on more debt than they can handle. 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.
Private label and conventional store cards: credit for physical stores
Now let’s take a look at the more traditional credit card scheme. On the plus side, both credit cards and private-label store cards provide consumers with long-term, revolving credit. Credit card companies rigorously screen applicants and sign up only those with proven credit history and an estimated debt-to-income (DTI) ratio. The revolving line of credit can be used and reused without having to reapply.
Unlike BNPL installment loans that fund individual transactions separately, a revolving credit account combines all transactions into one consolidated line with a monthly balance and payment plan.
On the downside, credit cards were designed for offline retail environments and are not optimized for online transactions. Approval of a conventional credit card application usually takes hours or days, unlike instant approval of online BNPL offers. And when it comes to shopping online, the requirement to enter a credit card number and CV code for each transaction is cumbersome. It’s particularly a turnoff 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 merchants that offer them.
In the end, neither BNPL installment loans nor traditional credit cards and private label store cards provide the optimal online shopping 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 fast and convenient application directly from the e-commerce shopping cart. Completing transactions is also fast and frictionless. Like BNPL, Digital Revolving Credit is designed specifically for e-commerce.
One of the main advantages of digital revolving credit is that it is not limited by a fixed payment schedule. Consumers can structure their payment schedule to meet their individual needs and budgets, making it easy to make payments on a consistent basis. Also, 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 signing up and enrolling consumers (that includes credit checks).
Creating a digital “tab”
This is another key benefit of digital revolving credit: an account can be opened once and used over and over again indefinitely, as long as the customer stays current. That’s attractive to merchants selling products that lend themselves to repeat purchases or even subscriptions.
In other words, consumers may see digital revolving credit as a way to allow them to make purchases on a digital version of a “tab.” Monthly payments on the tab are made flexibly according to the buyer’s budget needs, and additional purchases can be added to the tab as long as the credit limit is not exceeded. The consumer does not have to reapply for additional financing each time he wishes to make additional purchases. And because digital revolving credit accounts are private, they can provide a line of credit for discretionary purchases separate from family credit card accounts.
Increased 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 buyers to continue using their line of credit on a recurring basis. Instead of “Buy now, pay later”, this method could be more aptly described as “Buy often, pay flexibly”. This approach uniquely maximizes a gold metric of most ecommerce merchants: higher customer lifetime value (LTV). This measures the total potential amount of business a merchant can expect from an individual consumer over the life of the relationship. Digital revolving credit can create a much higher LTV than short-term BNPL installment loans.
Digital Revolving Credit provides the ease of use and modern delivery of BNPL (designed specifically for eCommerce) with the traditional revolving credit model offered by credit card companies. It is a flexible solution that enhances the lifetime relationship between merchants and their customers.