How Digital Revolving Credit Translates into Lucrative Recurring Purchases
By Tim Harris, Chief Executive Officer, FuturePay Holdings Inc.
Digital credit offers an extraordinary opportunity for e-commerce merchants to tap into a generation of consumers who prefer online shopping to traditional retail. Within this emerging marketplace, consumers have the choice of installment or revolving credit solutions, with the former being far more prevalent. However, the more unique revolving digital credit option has keen advantages, including a greater capacity to incent repeat purchases.
Let’s examine the scope of this growing opportunity. According to global consulting firm McKinsey & Company, the widespread use of digital finance will “boost annual GDP for all emerging economies by $3.7 trillion by 2025,” representing a six percent increase compared to the current market. The total annual revenue for retail e-commerce merchants in the U.S. is forecasted to exceed $475 billion in 2020 (RJ Metrics/Statista). More than 10% of this market is expected to be offered in instant credit services through what are now referred to as “Buy Now, Pay Later” (BNPL) payment plans. And that $50 billion market is growing rapidly, particularly with younger shoppers. The Global Payments Report 2020 by Worldpay projects that, in the next three years, while credit card transaction volume will fall, BNPL transaction volume will grow by at least 54%.
The majority of digital credit accounts are currently installment-based, where consumers typically make payments according to predetermined and often rigid monthly terms. Digital revolving credit offers several specific advantages over installment-based solutions, including the ability for the consumer to set more flexible repayment terms that better accommodate their budgets.
But what’s more significant about revolving digital credit is that it attracts a highly sought-after type of customer—the repeat buyer. In offering digital credit that users can continue to access, customers are encouraged to return to their preferred merchants and make additional online purchases. Since consumers don’t have to re-establish a credit line for each transaction, recurring business is easier and more friction-free, increasing the likelihood that customers will revisit their favorite e-commerce sites.
The product categories suitable for sustaining a recurring purchase model differ from those better served by an installment plan. Consumers might purchase a hot tub or a boat through an installment plan and receive fixed monthly payments. These big-ticket items don’t lend themselves to repeat purchases—they’re a one-time sale. In comparison, an online retailer selling merchandise that is suited to repeat purchases, such as cosmetics or pet supplies, can realistically expect customers to return on an ongoing basis to re-order merchandise and tap into that available credit line.
Digital revolving credit therefore has a far greater tendency to foster customer loyalty, which translates into sizable recurring revenue and substantial profits. This leads to a unique opportunity for merchants to implement subscription-based programs—the holy grail of e-commerce merchandise payment models. As providers in the digital credit market, FuturePay has historically seen that average order values around the $200 to $500 range better lend themselves to monthly subscriptions than large-ticket transactions. Such subscriptions extend the convenience of automatic renewal to the consumer while building predictable revenue streams for the seller.
Research from business consulting firm Fuel notes that the e-commerce subscription market represents approximately $12 billion to $15 billion in potential sales. Since 2014, the sector has grown at a compound annual growth rate (CAGR) of close to 60 percent, and Fuel predicts it will continue on a rapid trajectory. As long as purchasers remain current with their payment schedules, which can be offered on a more flexible and customized schedule than traditional, installment-based credit card accounts, they’ll be able to receive their favorite skincare products, holistic remedies, or software on a scheduled basis without even clicking a mouse.
Digital revolving credit not only creates greater convenience for consumers, it fosters customer loyalty and produces repeat shoppers. This is a far more desirable customer profile to pursue. In comparison, one-off purchases leave the consumer to move on to their next merchant relationship. For mid-tier e-commerce retailers, revolving digital credit is a key way to build a recurring customer base.