Who's using installment loans at the point of sale?

Installment lending, whether it’s online or at the physical point of sale, is a market sector that has been experiencing a global boom in consumer demand for the last several years. Installment loans are different than credit cards since they are not open lines of credit and are typically used for a specific purchase. This can help consumers overcome the stigma of borrowing in certain markets such as Germany, where cash and bank transfers tend to dominate the payments landscape; or in the U.S., where millennials fear amassing unwanted debt.

Is this a short-term trend or are there potentially deeper-rooted factors that could make installment lending, especially online, a major source of future loans? Visa recently announced an installment lending API to allow its issuers to participate in this market. Affirm, which recently raised $300 million in capital for expansion, and announced a partnership with Walmart to fund POS loans at the retail giant are signals of a potential shift in habit.

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When it comes to asking for installment credit to facilitate a purchase, men overall tend to ask for more money than women and at certain ages, the difference is almost 70% greater. According to Divido’s Global Lending Report which surveyed 700 bank executives across seven different regions, including the U.S., U.K., Germany, France, Spain, Italy and the Nordics, the size of the amount requested for individual installment loans was greater when men made the request for installment credit compared to when women made the request.

Divido, which provides a white label installment lending origination and servicing platform, says its Global Lending Report demonstrates a general consumer pushback against credit cards and a desire for greater flexibility when it comes to borrowing. Indeed, installment loans can be much more tailored to meet individual needs than credit cards can and they even have the ability to make a product more appealing based on financing alone.

“There is a generational shift occurring when it comes to the negative stigma of borrowing, especially for high value products. Younger consumers don’t feel the guilt older generations do when it comes to installment loans for expensive items such as cell phones, mattresses, and laptops,” said Christer Holloman, CEO of Divido. “In fact, we’ve already been trained by the mobile network operators to accept an installment payment plan on our monthly bills for our cell phones.”
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Three-quarters of “buy now, pay later” installment users in Australia are millennials and Gen Z, indicating that the product has found a great deal of favor with younger consumers. According to Australian research house Roy Morgan's recently released Digital Payment Solutions Currency Report, there were 1.59 million Australians who had used an installment lending product in the 12 months ending January 2019. Since this represents just under 8% of the Australian population actively using installment products, there appears to be a tremendous opportunity for expansion.

Despite the Australian market having only 1.6 million active installment loan recipients, the country has been a hotbed of “buy now, pay later” innovation. Australia's Afterpay has carved out a niche in lending to the fashion/beauty segment which it in turn has parlayed it into an entry into the U.S. market by snagging multi-billion dollar retailer Urban Outfitters as a client.

New York-based installment lender Splitit recently chose to do its IPO in Australia because it saw a tremendous opportunity in that market despite competition from Afterpay and Zip Co. The reasoning for the move is that it wants to establish a presence in Australia and it feels that the market is ripe for opportunity because Australia is already a big market for credit card use.
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When it comes to underwriting installment loans, lenders are worried about fraudulent applications. According to Divido’s Global Lending Report, 32% of lenders are most concerned about fraud detection. Given that many applicants tend to be younger and have less data available about themselves, fraudsters may view this product sector as a prime opportunity.

“Remember these loans are point-of-purchase (POP), it’s not just e-commerce. POP is agnostic of the channel,” noted Holloman. This increases the opportunity for customers to apply for loans, but it also increases the risk of fraud since lenders have to guard more than one channel.

Lenders also want a strong user experience that expedites the loan application process while capturing enough data to adequately underwrite a prospect and build a relationship with a new customer. This means prospective lenders need to leverage any and all data that a retailer or platform provider is able to capture.
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Installment loans help smaller retailers compete with larger rivals such as Amazon during peak buying seasons, when consumers tend to consolidate their shopping with fewer retailers. According a survey Splitit conducted last year on holiday shopping patterns, 40% of winter holiday shoppers planned to spend most of their dollars at a large retailer such as Amazon.

While Divido reports that the average transaction being funded on its platform is roughly $1,000, indicating a preference for high value items, it is well-known that millennials are increasingly using installment loans to enable purchases for much lower value items including $50 purchases for items such as t-shirts and jeans.
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One of the factors leading to the growth of the installment lending market is a rising financial burden being placed on younger consumers with little sign of abating. According to the Federal Reserve Bank of New York, 61% of student loan debt is held by consumers under the age of 40 years old as of 2017. Twenty-eight percent is held by consumers under the age of 30. In 2017, total student loans held were almost $1.4 trillion. In other words, the under 30 age group held $384 billion in consumers loans in 2017, up from just $148 billion in 2004.

Despite growing legislative efforts to forgive student loans, such as the recent bill proposed offered by Democratic presidential candidate Elizabeth Warren, young adults are becoming increasingly dependent on student debt to pay for their ever-increasing cost of attending college and universities.

Based on data from the Federal Reserve Bank of New York, total student loan debt more than doubled from $707.3 billion in Q1 2009 to $1.598 trillion in Q1 2019. CNBC reports that student loan debt will exceed $2 trillion in 2022, surpassing credit card and auto debt levels. The Federal Reserve has also written a paper hypothesizing that rising student loan debt could explain the decrease in home ownership levels for young adults, in that they simply can’t afford to buy and need to rent.
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