Investors push installment payments into more mature markets

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Fintechs providing installment loans are attracting significant funding from investors who see opportunities in developed economies for consumer financing products, which are already well established in emerging markets.

Installment loans on credit cards became popular in Brazil in the 1980s due to high inflation. Now installment lenders such as Klarna, Splitit, Afterpay and Affirm are leveraging technology such as real-time credit-scoring to offer instant financing on digital shopping channels and in brick-and-mortar stores. They are attracting consumers in developed economies who are wary of revolving credit card debt, including digital-preferred U.S. millennials, lower-income consumers in Australia, and cash-preferred customers in German-speaking countries.

Affirm completed a $300 million funding round in April. That event, and $460 million raised by Klarna in August to expand its U.S. business and enter Australia, highlight opportunities in European, Australian and U.S. buy-now-pay-later markets.

In Australia, where 10% of the adult population has used buy-now-pay-later loans, investors are enthusiastic about installment lenders. In June, Australian market leader Afterpay raised AU$317 million in equity on the Australian Securities Exchange and, so far this year, two U.S.-based installment payment firms have held IPOs in Australia.

Sezzle, which operates only in North America, raised AU$43.6 million in July, while Splitit raised AU$30 million in January to fund its Australian and Asia-Pacific expansion. Unlike its rivals, Splitit doesn’t require consumers to apply for credit lines, as it charges installment loans to their existing cards.

Commonwealth Bank of Australia (CBA) invested US$100 million in Klarna as part of the Swedish firm’s August 2019 fund-raising, and became its exclusive Australian and New Zealand partner.

“CBA has a strong footprint with Australian merchants through its acquiring business and could leverage this to offer Klarna to its merchants,” said Brad Pragnell, principal of 34 South 45 North Consulting. “Klarna represents a serious challenge to Afterpay in Australia, along with Splitit, which rides Visa and Mastercard’s rails.”

PayPal sees a massive opportunity driving more competition into the installment payments market, according to Susan Schmidt, PayPal’s vice president of U.S. consumer credit.

“We’ve not come near the level of penetration that we’re targeting over the next five years. PayPal Credit has over 2 million U.S. millennials in its portfolio, as this demographic doesn’t use traditional credit cards in the way previous generations did," Schmidt said.

PayPal said in February that its PayPal Credit buy-now-pay-later subsidiary had processed $50 billion in total U.S. payment volumes since its 2008 purchase of Bill Me Later. Klarna’s U.S. operation is growing at an annual rate of 6 million new U.S. consumers, and supports 3,000 U.S. merchants, said Klarna spokesperson Aoife Houlihan.

Afterpay has 200,000 customers in the U.K, where it is known as ClearPay. In the U.S., Afterpay is adding 50% more U.S. customers a day than its daily average in the year to June 30, 2019, Afterpay said, without divulging any details.

To prevent disintermediation by fintechs, JPMorgan Chase and Citigroup have added installment lending features to their credit cards, while Visa is piloting APIs enabling issuers to extend installment payments to existing credit card customers at checkout.

“Visa’s APIs enabling banks to offer installment loans, Mastercard’s April 2019 acquisition of POS financing provider Vyze, and Amex’s ‘Pay it Plan it’ programs enable FIs to compete with fintech lenders,” said Krista Tedder, Javelin Strategy & Research’s head of payments research.

Installment payments account for 80% of online Brazilian credit card purchases and, according to ABECS (Associação Brasileira das Empresas de Cartões de Crédito e Serviços/association of Brazilian credit card issuers), 50% of total credit payments volume. Merchants charge customers’ cards each month until the loan is repaid, or they can receive the full amount up-front in return for a fee to their acquirer.

“The vast majority of installment loans are interest-free, but it’s becoming more common for Brazilian retailers to differentiate prices to compensate for the higher interchange on installment transactions,” said Guilherme Lima, CEO of Ponto Futuro Consultoria Estratégica.

Since March 2019, Brazilian banks have been offering their credit cardholders a new form of installment loan — a pre-approved line of credit — which doesn’t require merchants to charge installment payments. Cardholders are charged interest rates from 0.99% to 3.99% per month, and repay their loan in up to 36 installments. Merchants receive settlement within five days.

Germany, Austria and Switzerland have a significant proportion of consumers who don’t have credit cards or don’t feel comfortable using their cards online due to security concerns. In Germany, according to Deutsche Bundesbank, credit cards accounted for 5% of the total value of payments in 2017, with cash accounting for 48%.

“The No. 1 choice for e-commerce purchases in Germany, Austria and Switzerland is consumer invoicing, where people purchase online, the product is shipped to them, and they pay the invoice within 30 days,” said Claire Gates, CEO of U.K.-based Paysafe Group’s Paysafe Pay Later business, which offers payments by invoice and installment loans in Europe and the U.S. “This only requires them to reveal basic personal data such as name, date of birth, and phone number or email address — that’s enough for Paysafe to do credit checks on them and authorize merchants to dispatch the goods for payment by invoice.”

The number of Australian buy-now-pay-later users rose from 400,00 in 2016 to 2 million in 2018, while the number of transactions rose from 80,000 in June 2016 to 1.9 million in June 2018.

“Forty percent of buy-now-pay-later borrowers earn under AU$40,000 a year, and current loan balances total AU$1 billion,” said Michael Swannell, managing director of KeyOne Consulting. “One in six are overdrawn, have delayed the payment of other bills, or borrowed more money to pay the installments.”

Concerns about the growth of buy-now-pay-later lending in Australia led to a regulatory enquiry last year by the Australian Securities and Investment Commission (ASIC). In April 2019, legislation was passed giving ASIC powers to regulate buy-now-pay-later providers.

“This will allow ASIC to protect at-risk consumers who have become overdrawn, delayed payments, or borrowed additional money to meet their payments,” said Swannell.

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