More companies are using installment payments to lure consumers away from credit cards, and MasterCard is testing a model that could lure them back.
MasterCard will test its own installment payment system in Europe later this year. Issuers will invite consumers to sign up for the service, which will be activated as part of the existing card account, so there's no need to issue a new line of credit.
"It's not in any way going to cannibalize credit cards," said Andrew Buckley, group executive of core products for Europe at MasterCard. "We spoke to one bank that had this, and the executive was dismissive of the idea that installment payments would hurt credit cards."
During the test, consumers will choose between debit, credit or installments at the point of sale. Consumers and the retailer agree on the number of months and the payment amount for each month, all within parameters that the issuer sets. The issuer can then approve the transaction and set the rates for the installment payments.
There will be some variability in the fees, though for the installment program to work, the fees would likely have to be less than normal interchange for credit card purchases.
"Based on our discussions with issuers, they will price this at a different rate than normal credit and that rate will probably be lower," Buckley said. "In some cases, we hear issuers may make the first one or two installment payments free and charge more for later months."
MasterCard surveyed about 10,000 consumers in Europe, and found an appetite for more flexibility, visibility and control over payments. There is a "sweet spot" for installment payments, generally for items that are below the threshold for a very large credit card purchase, or the smaller purchases that are more common with debit cards, Buckley said. He envisions purchases of several hundred dollars for household appliances or vacation travel.
"If you buy that television, you want to know what you're paying each month for that television and for how many months," Buckley said.
This model is usually used in marketing campaigns to sway people from credit cards. Splitit, formerly called PayItSimple, handles installment payments for e-commerce merchants globally. Affirm, a mobile payments company founded by PayPal co-founder Max Levchin, also offers installment payments.
Another provider, FuturePay, is expanding its technology for the omnichannel shopping experience, where installment plans can be initiated in either mobile or physical retail channels. PayPal also hopes to use its long-standing installment option as part of its push into physical stores.
"Credit customization is coming to the point of sale and coming fast," said Richard Crone, a payments consultant. "Defining custom payment terms is not new but mass customization with economies of scale at the point of sale is."
Private label credit providers have offered installment plans for decades, Crone said, but mobile wallets will make it more practical to bring the model to other payment types.
"Mobile wallets will let consumers do this in the privacy of their own phone, without any embarrassing interaction with store clerks," Crone said, adding that can increase ticket value and create a new category of lending.
M-commerce driven installments are used mostly in Europe, though that's expected to change as the myriad providers target the U.S. to expand their footprints. MasterCard also sees potential outside Europe for installment payments, Buckley said.
"As we see digital payments expand you will see a move toward consumers choosing at the point of sale between 'debit,' 'credit,' and 'installment,'" Buckley said. "Today all of those are considered different types of payments, but I see them converging."
MasterCard is positioning the product as a way to streamline the store credit experience. While installment payments exist in many European countries, a specific terminal is often required for each bank that partners with the merchant.
"You can have up to ten different terminals for installment payments," Buckley said. "The consumer has to tell the store clerk which bank he or she has an account with, and then go to a terminal for that bank. We can deal with that pain point."