A new school of challenger brands is beginning to reshape the face of short-term lending.

From Buy Now Pay Later (BNPL) to in-the-moment offers and instant credit activation through virtual cards, credit is getting more flexible and fast-paced. Not only does this put the power in customers' hands, but it also reshapes how they interact with credit products, transforming their overall experience.

Here we'll look at how banks can use the trends transforming credit to get closer to customers. 

New models for repayments enable greater flexibility 

A range of non-plastic credit products from providers like Affirm, Square, and Zilch (Europe's fastest growing Unicorn) are reshaping lending. These BNPL products give customers different ways to slice their payments – pay in installments or in full at a later date, with little to no interest.  

"Credit card issuers offering perks like longer grace periods and payment holidays are popular with a financially savvy generation," explains Simona Das, Senior Product Manager at 10x. "Customers want the option to convert payments into a series of installments with lower or no interest rates attached." 

Global Payments found that BNPL is expected to account for 24% of all global ecommerce transactions by 2026, though it has come under some fire for a lack of regulation, as reported by the Fintech Times. Regulators are concerned consumers may not fully understand the implications of entering into a BNPL scheme.  

Although it's increasingly popular, BNPL isn't a new concept. In the 60s and 70s, people put money away at retailers, for example, at the grocers, ahead of Christmas. This is the same principle – spreading the cost of something over a series of payments.   

Today, there are two key differences. First, technology allows this to be accomplished on a much bigger scale. And secondly, providers have built consumer brands around it. Monzo and Zilch, for example, tend to be used by a younger demographic than credit cards like American Express. 

According to YouGov, customers globally are 44% more likely to use a credit card for budgeting purposes than a year ago. "With modern credit facilities, customers can impose spending limits on certain categories, such as retail or eating out, to help budget effectively," Simona adds.  

New ways to pay are blurring product lines 

Today, we're seeing more fluidity between products, giving greater control to the customer. Curve and Monzo Flex are two examples where customers can go back and split payments retrospectively, enabling more flexible budgeting.  

If a customer's boiler breaks, they could review their recent transactions to transform cash flow rather than taking out a loan, which would come at a higher interest rate.  

"Banks tend to segregate overdrafts, loans, credit cards, and mortgages into distinct divisions," explains Frankie Woodhead, Director of SuperCore® at 10x. "Someone working in a cards division will rarely speak to someone in loans, but customers are more and more likely to treat these things as one and the same."  

With a next-generation core, a customer can have several lending components attached to a single current account. For example, a loan for a new car, a credit facility to spread the cost of regular purchases, and a pot for balance transfers could all sit on top of a standard current account. From the customer's perspective, what matters is that they have tailored lending options that facilitate their needs. It doesn't really matter to them that purchases are enabled through different banking products – their focus is what they allow them to do.  

"One of our key differentiators is enabling fluidity across these financial products." Adds Frankie. "Instead of getting a credit card, and that's it, done. With our core, a bank can seamlessly transition a customer from an overdraft to a loan to a card as their needs evolve." 

Rewards and loyalty are getting more personal 

Standard credit card perks include airline miles, hotel points, cashback, and other rewards. Two in five consumers globally say it's one of the things they value about their cards – although YouGov found that they are distinctly more popular in America and Asia than in Europe.  

"Typically, credit card rewards are pretty generic," explains Katie McNeill, Product Manager at 10x. "You'll get an email sent out with a list of offers or rewards, or you'll go through the app and scroll through to find things that interest you."  

This requires a lot of effort on the cardholder, who must proactively look at what's on offer and think ahead about how they're going to spend – "you're only going to do this every so often when you get notified." adds Katie.  

Zilch and Monese are doing their bit to bring the credit card rewards experience into the 21st century. Zilch offers voucher codes for places where customers spend. Monese integrates with Avios and offers weekly discounts for a changing roster of retailers.  

But a lot more can be done – using real-time data, customers could be given contextual offers at the right time and place. "With 10x, banks can use data to send hyper-personalized rewards, based on spending habits, that are also relevant to what customers are doing."  

For example, suppose a customer buys a flight online. They could then be notified of a 5% cashback on Booking.com or a discount on airport lounges.   

But that's just the start. With a single core powering multiple product lines, banks get a clear and up-to-date view of every customer's entire relationship.  

"If a customer has a current account with a child's account tied to it, they're going to want offers relating to fun days out for the family, like Disneyland offering cashback on bookings," explains Katie. The more data on offer, the better the personalization and relevance of rewards.  

"Having that real-time data feed helps banks visualize how customers spend money, which is a powerful insight that can be shared with third-party reward providers." 

"Having a mutual ecosystem where you're both supplying valuable data may mean rewards providers can give you better offers as a result." 

How banks can close the challenger gap 

We're seeing some interesting moves from challenger brands in the credit space. However, the rich datasets that banks hold give a considerable advantage if they can mobilize this in real time, spin up propositions faster, test and learn more readily, and quickly adapt based on demand.  

This will enable banks to augment their current credit card offerings and bring some newer, more innovative touches into the mix to capture customers' attention.