The future of consumer credit: No one-size-fits-all solution

April 3, 2024 | By Valerie Nowak
The varied nature of consumer credit markets across Europe means there’s no ‘one size fits all’ solution for the future of pay solutions. Instead, customers have the opportunity to revamp their credit value proposition in a variety of ways, according to their products, company and market context, as discussed in Mastercard’s Future of Credit Report.

Consumer credit markets are not uniform across Europe. The UK, for example, is known for its large revolving balances on credit cards, while Sweden and Poland are card-averse markets. Each country presents a different product mix, growth varies by country and debit continues to dominate in Europe. In recent years, consumers have become more digitally aware and new solutions have appeared across the region. Overall, the consumer credit market is being shaped by five key drivers: unemployment levels; inflation; increasing interest rates raising the cost of credit; consumer spending and credit card usage type.

Seven trends to watch

1) E-commerce remaining a key driver. From 2019 to 2021, the growth of e-commerce surpassed all expectations; lockdowns and COVID-19 restrictions played a significant role in driving consumers to shift to online purchasing. For those who struggled during the pandemic, buy now, pay later created an opportunity to manage their cash flow. We can expect to see e-commerce capture an increasingly large share of the retail market, due in part to the choice and convenience of shopping online.

2) The rise of contactless and digital wallets. Consumers continue to change their payment behaviour and adopt the most convenient ways for them. Successful Pay Later options need to respect that.

3) Better and faster ways of providing. There are still many hurdles in accessing credit. Open Banking and new technical solutions are reducing or removing some of them.

4) Unlocking Pay Later flexibility. Consumers need choice. Between Debit and Credit there are many colours and flavours of Pay Later flexibility that opened a new space for innovation.

5) Providing credit in high-interest environments. Consumer credit providers have seen their profitability impacted by the high interest rates. Consumers are more conscious about cost of money and late payment costs.

6) From rewarding to sustainability. Consumers have always loved cashback and miles, but rising ESG awareness may call for sustainable spending in the future.

7) Navigating credit consumer regulations. Central banks and regulators have developed regulations to protect consumers and markets from damaging credit practices. There is uncertainty on future consumer credit regulation, and it is not likely to get any less stringent.

Credit value proposition: The main factors

So what is advisable for any existing and new player in the Pay Later space? We identify three factors for a successful consumer value proposition.

First – enabling consumers to Pay Later with greater choice flexibility when it comes to Buy Now Pay Later, enabling them to stay in control of their finances via innovative solutions. For example, by offering both debit and credit card customers a standalone instalments card so that each purchase is installed over time by default. Or the option to give a month’s ‘holiday’ to ease the pressure a valued customer is facing? This type of flexibility will help customers better manage their monthly outgoings, thus feeling in greater control of their finances and living a more healthy financial life.

Safer and faster access to credit is also a key factor. This means simple customer onboarding with faster and more robust credit decisioning. New technologies, such as Open Banking and Artificial Intelligence are providing new data inputs that make credit decisioning more accurate, avoiding turning away solid customers. Consumer Finance companies can access information from trusted third-party sources, requiring less information directly from the customer, as a result making the customer onboarding experience simpler and faster.

ESG goals can also be a driver of customer value. Integrating your ESG DNA into your product can empower customers to act on causes and plays an important role in shaping their decisions as consumer interest in sustainability grows. An example is the card industry’s replacement of plastic cards with recyclable materials, to help address their impact on the planet. Some financial institutions offer Carbon tracking for Sustainability rewards programs, encouraging consumers to make mindful spending choices, whilst some credit card issuers enable consumers to make microdonations. We are at the beginning of a new frontier when it comes to the health of the planet; it is now up to the entire financial industry to integrate these new consumers values into the design of their commercial offers to earn the trust of tomorrow's consumers.

To summarise, when it comes to the future of credit, change is a certainty, as the need for consumer finance remains and alternative payment methods become increasingly dominant. Consumers want convenient digital experiences and the future of credit needs to embed this concept. The only choice is to evolve and make the most of the considerable opportunities that are opening up. Credit is and will remain an attractive, profitable and exciting space, ripe for innovation.

You can access the full report here.

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Valerie Nowak, Executive Vice President, Product and Innovation, Europe, Mastercard