Building customer loyalty in a high-interest environment

Rising interest rates drive retailers to seek new options that will encourage safe consumer spending. That is good news for companies like Accrue Savings, which offers an FDIC-insured wallet that helps customers build a balance with their favorite retailers. The incentivized wallet deepens brand engagement.

According to a recent Bankrate retail card survey, the average annual percentage rate on retail credit cards reached an all-time high of 28.93% this year, up from 26.72% in 2022. That is well above the average of 21.19% on all credit cards.

There is growing evidence that buy now, pay later (BNPL) is more expensive than credit cards. BNPL users are more likely to accumulate credit card debt. According to CivicScience, 54% of BNPL users reported having credit card debt in July. That compares to 38% for non-users and 35% for intenders. (The industry is adjusting as BNPL acceptance rates are dropping.)

Multiple bills targeting interest, consumer debt

Legislators have noticed. Sens. Dick Durbin and Roger Marshall have introduced the bipartisan Credit Card Competition Act of 2023, which Durbin said would enhance competition and choice in a market dominated by Visa and Mastercard

“Building off of debit card competition reforms enacted by Congress in 2010, the bill would direct the Federal Reserve to ensure that the largest credit card-issuing banks offer a choice of at least two networks over which an electronic credit transaction may be processed,” a statement on Durbin’s website reads. “The legislation is estimated to save merchants and consumers $15 billion each year, and Durbin and Marshall recently urged the Senate to bring the bill to the floor for a vote. 

“Visa and Mastercard wield enormous market power in credit cards; according to the Federal Reserve, they account for nearly 576 million cards or about 83 percent of general-purpose credit cards.”

Hawley, Sanders, and Warren also taking action

Sens Sheldon Whitehouse, Jack Reed, Elizabeth Warren, Bernie Sanders, and Jeff Merkley have introduced the Empowering States’ Rights to Protect Consumers Act. If passed, it would allow states to limit consumer loan interest rates.

“Our bill would amend the Truth in Lending Act of 1968 to clarify that credit card companies and other consumer lenders—regardless of their location or legal structure—must abide by the interest rate limits of the states in which their customers reside,” Whitehouse said in a statement on his website. “In my home state of Rhode Island, for example, there was a state-level interest-rate cap for many years, but the cap was abandoned after the Marquette decision rendered it moot. The Empowering States’ Rights to Protect Consumers Act would allow Rhode Island to re-instate a cap.”

Sen. Josh Hawley introduced the Capping Credit Card Interest Rates Act this fall. It proposes an 18% APR credit card cap, prevents credit card companies from imposing new fees to evade it, and imposes penalties on credit card companies that violate it.

“Cumulative consumer credit card debt recently surpassed one trillion dollars, the highest level in history,” Hawley said on his website. “Last year, many major credit cards soared past the 30% interest rate threshold for the first time, and now the average rate of interest is hitting a record level. This means working people face higher financial burdens while the biggest banks are booking bumper profits and wielding immense power over the market.”

Loyalty programs at risk

Accrue Savings CEO Michael Hershfield said federal legislators are also watching smaller regional banks. That will impact many fintech players. Additional legislation would cap interchange rates.

Hershfield said that would be “traumatic” for loyalty programs, as many are funded through interchange rates. Bad for the companies in that space and for their customers, but the overall effect will be muted.

“The majority (of users) are a wealthy consumer base, so the average rank-and-file consumer is not able to benefit from some of these high-point systems,” Hershfield said. “So there is no value, potentially, for some of this legislation.”

Holiday shopping season brings risk

There are some terrible signs heading into the holiday shopping season. Delinquency rates have risen from 3.69% to 5.78%. Inflation is rising. The hangover in early 2024 is shaping up to be a whopper.

“That through January, February, March and April, consumers are going to be impacted quite significantly by the 28, 29, 30% interest rates that they’re paying off on their credit card,” Hershfield said. “That’s a lot of pain that we are fronting in the first half of 2024.”

Some have long warned of a BNPL bubble. As BNPL grows older, we know that those burdened by heavy credit card debt can turn to it, thereby worsening the problem.

New loyalty-building strategies are required

The current climate lends itself well to Accrue’s balance-building wallet. Lower credit card and BNPL approval rates have retailers searching for new loyalty-building and retention strategies.

Michael Hershfield said today’s challenging environment has retailers seeking new loyalty strategies.

“We’re going away from a nice-to-have to a must-have because of what’s happening in the U.S. consumer marketplace, and this is the evolution of business,” Hershfield said. “I started this company two years ago. In 2024, it will be a very different year with distribution, and our partners will change. We’re going to have a lot of large partners that have become aware of this consumer pain point.”

Many Americans save for travel, experiences, furniture, home renovations, cars and electronics even as they spend. Whereas consumers with bad credit were more limited before, now the square peg fits into a square hole. Hershfield expects to attract retailers from across these sectors.

Accrue Savings plans on delivering more value as they attract more retailers seeking a reliable loyalty-building option. Hershfield sees an enhanced wallet experience offering payment diversity, further driving loyalty.

“It’s also giving loyalty to consumers through a wallet experience,” Hershfield explained. “It’s not just about the version one that we’ve seen for so long, the tap-to-pays or include your credit card. There’s so much more to it. That’s the work we’re the company focused on next year.”

Leveraging the power of social is a must

Innovative fintechs must recognize the growing influence of social networks and build that into their design. Accrue Savings recently introduced a social contribution layer where savers can augment their funds by crowdfunding. As more people save for more things and plan on giving gift cards this season, that is a good development at a good time.

“Social engagement is so important now… Tiktok, Instagram…,” Hershfield said. “We think that social interaction, asking friends to contribute to your purchases, is something where there’s a huge opportunity. 

“People like to talk about their finances. What is the opportunity for us and merchants? GoFundMe has been around for a long time. Still, this new trend around consumers having much more transparency around their financial situation, I think in the end, is going to be pretty powerful.”

This phenomenon has blown way past fintech. It now influences how products and tools are built. It doesn’t end at social media; it begins there.

“I think there’s been a wide new education about credit scoring because it’s a good social media topic,” Hershfield said. “There are several interesting trends that have happened through social media that I’m excited about. I’m excited about it because it means there’s literacy happening. Most consumers don’t realize how to use credit and the impact that has if you don’t pay a card off.”

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  • Tony Zerucha

    Tony is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT's Unchained, a blockchain exposition in Hong Kong. Email Tony here.