Fintechs battle for an edge as merchants demand install payments
Installment payments are catching on quickly with merchants and their customers, creating a fierce competition among rivals who are building different models to approach the new market.
The concept has become so popular, Splitit CEO Gil Don believes that in the next three to five years all U.S. merchants will have an installment payment option available at e-commerce checkout or the physical point of sale.
"You see the market trending that way," Don said as his company enters its second year of providing installment payments online and at the point of sale. "It's another tool to make sales and it doesn't cost anything to the consumer."
The concept of interest-free payments resonates with consumers, who can see a $1,000 purchase turn into four manageable monthly payments, while the card brand and merchant get full payment upfront.
Splitit puts a "hold" on the card payment on its end, taking the installment payments from the consumer and a fee from the merchant, who hopes the Splitit option can help make a sale that the consumer might have otherwise balked on.
"I'm not sure I would agree with the hype that every merchant will offer this, but there's no real downside to doing so, as it gets the transaction through and consumers seem to really like it," said Brian Riley, director of card services for Mercator Advisory Group.
Some areas of retail will be far more likely than others to offer installment payments at checkout on a card transaction, Riley said. "If you were operating a bicycle shop, for example, there is no reason you wouldn't want to offer this."
Affirm, founded by former PayPal exec Max Levchin, initially operated as a loan company encouraging payments that could be made without a credit card with interest attached, depending on the cost of the transaction and the consumer's credit rating. In the past year, it included an interest-free installment option for consumers.
Swedish bank Klarna also offers various types of financial services and payment plans for e-commerce merchants. Having been in operation for nearly 10 years, Klarna has established options with interest, reduced interest, deferred interest or no interest. The no interest option comes into play similar to a Splitit payment in that the full payment is committed in what Klarna calls its "pay later" or "slice it in 4" payment option.
This momentum has even led Visa to invest in these types of companies while also testing an application interface for its issuers that would extend an installment loan option to existing credit card customers at checkout. After all, consumers who find an installment option appealing are still moving transactions across the card network rails — and possibly some they might have otherwise skipped.
When putting its "hold" on the full credit card payment, Splitit does not put that hold on the remaining balance of the card, as that could hurt an installment plan user's credit rating.
"We only charge for the first installment," Don said. "The hold is simply to not allow the consumer to overspend and to assure they will make the rest of the installment payments."
There is not as much concern about fraud or defaults on payments, especially for Splitit. The merchant's and card network's fraud prevention layers come into play, as well as Splitit's, which is provided through Forter.
"It's not likely fraud would occur on an installment payment plan," Don added. "The fraudsters want to make a payment and hide; they can't be exposed for months making payments."
Currently, Splitit installment options are available for consumers using Visa, Mastercard or UnionPay cards. The company continues to work with American Express and Discover to determine if their technology can integrate with Splitit to put the holds on card payments needed to offer the installments.
The potential downside for any installment payment provider is simply dealing with the human nature aspect of consumers.
"From the consumer side, how many of these installment payments can you handle at a time," Mercator's Riley said. "It makes sense for a high-value purchase, but it might be impractical to do it for several purchases in the same time frame."
Those using cards that offer rewards would also have to make sure that any installment option or loan they were utilizing would not affect their overall points, Riley added.
The integration issues and program offering stipulations aside, the installment payment market appears poised to grow as payments technology continues to advance.
"Any new solution that comes to market and makes a lot of noise, that is good for all of us because more consumers and merchants become aware of the options," Splitit's Don said. "This is a solution that is complementary to consumer financing because there are two types of consumers — the one who can pay and other who cannot and needs to get a loan."
For New York City-based Splitit, the majority of its consumers have credit cards and can make the payments.
"Still, if you are a merchant, you need to offer a consumer financing option as well as a credit card-based option like ours," Don added.