Install payments' battle against credit debt spills into supply chains

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Boosted by companies like Klarna, Affirm and Splitit, payment installment plans have become a popular alternative to credit card debt for consumers — and business transactions are the next target.

Splitit Business Payments, which was publicly unveiled Monday, allows businesses short on cash to secure orders from manufacturers and suppliers through agreed-upon monthly payments using company-issued credit or debit cards.

The New York-based Splitit sees opportunity on both the consumer and business side of the market. Splitit CEO Gil Don is betting his company's success on his view that all U.S. merchants will have installment payments at checkout within five years. Its new bet is there's a global market of merchants that are also seeking an option beyond revolving credit.

LLR Partners pegs the global B2B market at $120 trillion and the U.S. market at $25 trillion. Not all of these payments will go to installments, but there's still a huge market to work with.
Like Splitit's consumer product, the business option gives the buyer a choice to complete a purchase through a payment card, but pay the total in monthly increments, depending on agreed-upon terms. Splitit has already found early adoption.

"One of the challenges in our industry for a long time is that there are really just two options — you get credit from your suppliers or you give them a credit card," said Ron Kenigsberg, president of Miz Mooz, a women's shoes wholesaler based in New York City. "There has been very little innovation or other options, and this is the first one that comes along and says there is something in between."

In the case of supplying shoes, Kenigsberg says in the past a buyer could buy a case of 12 pairs of shoes with the assumption they could sell half of that in 30 days. But if they could not, then they can't pay what the shoes cost.

"Now, we are trying to give them more time to match up how the shoes will actually sell in the stores, with how they will pay us," Kenigsberg said.

As a growing number of merchants and their customers see the benefits of an installment option that still moves through the credit card network rails, Splitit believes many of these same users might also have business needs that could benefit from installment payments. The concept could avoid the problem of a business telling a seller that it lacks the money for an entire payment — after the order has been shipped.

"The biggest Achilles heel for many suppliers when dealing with small and medium-size businesses is a lot of back-and-forth about payment collection and the expenses associated with that," said Gil Levy, vice president of global marketing at Splitit.

Splitit has plenty of competition breathing down its neck in the B2C landscape, as more merchants embrace the concept. Thus, a natural progression was for Splitit to look for a niche with businesses, where it believes there is a service gap. "It's been the same as 20 to 30 years ago in that you have credit cards, CODs, bank wires and deposits," Levy said.

Getting rid of the collection problem and other headaches through installment payments while allowing companies better cash flow management could increase order size and improve relationships with customers, Levy added.

Those types of benefits "will largely appeal to the small business space, in particular where issues like liquidity and cash flow are at the fore of financial planning and payment decisioning," said Gilles Ubaghs, senior analyst with Aite Group.

A B2B installment payment option could also gain traction in the growing business e-commerce space, Ubaghs added.

Other companies are seeking ways to smooth out the B2B payment process as well, Ubaghs said. "Most notable is what they call the credit-as-a-service model that aims the solution at suppliers as a means to drive more sales with buyers and be heavily integrated into the broader enterprise resource planning and invoice automation chain," he added.

With Splitit Business Payments, a buyer is given the choice of using the installment payment plan instead of a purchase order, making a deposit of a third of the value, or working through other lending options. The seller puts a hold on the full amount of the order on the buyer's business credit card as a deposit, without charging the account. Both sides then agree to the terms on a monthly payment plan, and Splitit monitors the payments and adjusts the balance.

Prior to understanding how Splitit transactions move over card network rails, Kenigsberg of Miz Mooz said he had some concerns about the security of the authorizations.

"We had never used a credit card in that way before, in charging portions every 30 days, and we didn't want a scenario in which we were facing defaults," he said. "But we got comfortable with it as a card transaction and the network security and Splitit's security."

Splitit serves more than 500 merchants in 27 countries, and operates offices in London and Australia, as well as research and development in Tel Aviv, in addition to the New York City headquarters. The company started in 2009 under the name of PayItSimple, until a name change when it began serving U.S. customers five years later.

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