In today’s digital economy, everything from payments to personal finance is rapidly evolving. Banks and payment providers are often left struggling to keep up with constantly changing consumer preferences. As consumer wariness of the financial industry mounts, traditional forms of spending and saving are becoming obsolete. This, in turn, makes the current methods for assessing creditworthiness outdated, preventing good customers from making purchases. Why are providers failing to accommodate these shifts and what can be done to close the gap?

Shifts in Consumer Spending & Saving

Today’s consumers are placing less emphasis on saving and more on spending. In the past, people saved up to buy a house or a car, but Millennials and Gen-Z have less interest in ownership compared to older generations. As a result, 54% of Americans live paycheck-to-paycheck. While many might consider this a sign of struggle, over 60% of this segment are able to pay their bills comfortably. 

Consumers that make delayed payments don’t always do so out of necessity. A growing share use Buy Now Pay Later (BNPL) to conserve cash in case of an emergency. In fact, over 75% of consumers who use BNPL have the funds to cover the full cost of their purchase. The majority even have more than five times the amount of the purchase. While some are using deferred payments to better manage their income, others are doing so due to increasing dissatisfaction with credit cards. Studies show that 46% of retail shoppers use BNPL to avoid the high interest rates and revolving debt associated with a credit card. 

Having entered a struggling economy during the 2007 financial crisis, Millennials are becoming wary of the credit framework. They are increasingly suspicious of the financial industry, which is why they have greater aversion to debt and use credit cards less. Fewer Millennials use credit cards than any other generation because high debt burdens from student loans have made them hesitant to seek out additional debt. As a result, consumers are turning to alternative payment methods that come without credit liabilities. For example, Venmo processed about $58 billion in total payment volume in Q2 2021 alone. Beyond peer-to-peer lending, these services are now enabling users to make purchases at businesses using their reserve funds. 

Banks Aren’t Keeping Pace

Due to these shifts, the methods for assessing a consumer’s ability to pay are becoming antiquated. Lenders have typically sought evidence that customers pay their bills and have a solid track record of repaying their past debts. To make this assessment, they rely on credit reports from the national credit bureaus and on credit scores. As a result, the creditworthiness evaluation process has changed very little over time and no longer reflects the current financial habits of the general population. 

The current process doesn’t account for the fact that a rising number of consumers are intentionally avoiding incurring debt and therefore won’t even have a credit score. Instead, they turn to alternative payment options, such as Venmo or Cash App, which come without credit liabilities. Transactions made through these channels creates a spending history for consumers that financial institutions could be leveraging to assess payment risk. However, they are too slow to incorporate this alternative type of data that may be more accurate and in line with how today’s consumers spend and manage their finances. This creates difficulty for these consumers when completing transactions and furthers their distrust in the financial industry. It also creates a significant loss for retailers. When a customer gets rejected at checkout, there is little recourse that the retailer can take to help them complete their purchase. 

How To Address The Gap

Customers will blame the merchant when there is an issue at checkout, even if the decision is out of the retailer’s hands. To overcome this issue, retailers can leverage Deco, the only real-time recovery tool for revenue lost to payment authorization failures. Good customers are offered the choice to address the decline, take action, and complete the transaction, all with minimal friction. Don’t let the industry’s failures to evolve cost your business up to 1 of every 7 eCommerce dollars spent on your site. Get in touch with our team to learn how Deco can immediately convert 10-20% of declines into revenue.