Companies ought to carry out adequate checks on the ability of borrowers to repay travel loans on time. Otherwise, a surprise disruption such as an Icelandic volcano or an economic downturn could prompt defaults.
Several major sellers of travel, such as Expedia, United, JetBlue, Southwest, and Lufthansa, are testing extending credit to U.S. consumers to enable them to pay for their vacations over time rather than up-front.
Paying for a trip in monthly payments primarily appeals to consumers with average credit ratings who are willing to accept short-term, interest-based loans.
But consumers with high credit scores also appear to be getting tempted into splurging on luxury trips if companies lend them credit on attractive terms.
The new installment products — called layaway when paid off prior to trip and a loan if paid off after — have been common in developing countries.
But the concept hadn’t gained cachet in the United States until the past year.
What’s new is the rise of “fintech,” or financial-technology companies that aren’t banks, but that use software to provide financial services to consumers, sometimes in partnership with banks.
A few fintech startups — most prominently Affirm, Airfordable, and UpLift — are hoping that their services will make delayed payment for travel fashionable.
By slicing data finely with so-called generative artificial intelligence and other mathematical and computational tools, they believe they can manage the risk of making these non-traditional loans.
The Downlow on UpLift
This year, UpLift’s average 12-month travel loan through travel brands was $2,420, said CEO Brian Barth in an interview. For “highly-qualified” borrowers, it has typically charged an 8.99 percent annual percentage rate, he said.
Consumers participating in UpLift’s loans had an average FICO (Fair Isaac Corp.) score of 692. Scores range from 300 to 850. UpLift has lent money to customers with FICO scores as low as 475.
In UpLift’s tests, one out of five visitors to the payment checkout page of travel brand sites expressed an interest in using the startup’s installment-payment solution based on their click behavior. Uplift claims 5 to 10 percent of gross bookings on its participating travel- brand partners have been through its payment options.
The startup’s clients this year have included JetBlue Vacations, Southwest Vacations, United Vacations, and Spirit Vacations. It is adding products for travel agents.
Affirm said that its travel partners see a 20 percent increase in customer conversions, on average, by offering its product.
Affirm’s biggest travel client is Expedia. Expedia began offering Affirm on hotel bookings in May 2016, expanding that offering to include hotel and flight packages in July 2016.
Today, consumers in the U.S. can use Affirm to book flight and hotel packages anywhere in the world on Expedia, Travelocity, Orbitz, and Cheap Tickets. Expedia Inc. owns all of these brands.
Consumers do not need to pay off the Affirm loan in full before traveling. Once a customer buys a ticket or travel package, Affirm pays the merchant in full and then assumes the repayment and fraud risk of the transaction while the consumer makes fixed monthly payments.
Terms vary by partner. Recently the small online travel agency CheapAir ran a zero percent interest rate offer for Thanksgiving flights.
Sara Wyman, vice president of retail and travel partnerships at Affirm, claimed that her startup’s product offers better underwriting than its peers.
“We have a proprietary underwriting model that uses machine learning to identify creditworthy individuals,” Wyman said. “Unlike other providers who make the decision based only on an applicant’s FICO score, Affirm does a holistic review of each applicant, leading to 126 percent more approvals than industry averages.”
Another market player is Airfordable, a graduate of the YCombinator startup incubator. Airfordable has developed risk assessment software as an alternative to doing credit checks, which it claims makes the process more efficient.
It has focused on direct-to-consumer layaway plans that have to be paid off by the time of the trip. Consumers take a screenshot of their booking with a handful of the most popular travel providers, such as Priceline, Expedia, and Google Flights, and then pay for their trips in four installments plus a service fee.
Not a Sure Thing
Installment payments have long been popular elsewhere.
But it has had a checkered history in the U.S. In 2009, a PayPal-backed company BookIt offered installment payments to consumers.
In 2012, AirTran, Continental, JetBlue, and US Airways offered consumers a PayPal-backed product called Bill Me Later, which let passengers buy tickets without having to make payments for 90 days.
But the airlines dropped the product after it got in trouble with federal watchdogs for hitting consumers with fees. The airlines worried their brands were being tarnished by the aggressive tactics.
Consumer tastes for debt have also cooled since the 2008 financial crisis. There are some signs that millennials tend to be credit card-averse. Financial news source Bankrate estimated that 63 percent of them do not have a credit card. Presumably, these credit-shy people would also be reluctant to try installment payments.
Non-traditional consumer finance has been criticized in recent years, as pay-day loans, some auto loans, and subprime mortgage lending led many consumers and financial institutions to bankruptcy.
The startups focusing on travel loans said they are aware of such concerns. Affirm, for example, said it promises in its terms that “a customer will never be charged a penny more than the original price disclosed and agreed upon at the point of sale, meaning they won’t accrue any additional interest or fees ever.”
The other players make similar promises. Consumer watchdogs will be paying attention.
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Photo credit: The major credit card companies are being left behind as travel companies look to boost sales by working with startups to provide loans to consumers. Elise Amendola / Associated Press