Splitit's debit option makes trade-offs to reach millennials

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Splitit has recently begun offering point-of-sale financing with monthly installment payments for debit card purchases, targeting more budget-conscious U.S. and European consumers as well as those without credit.

New York-based Splitit, which also offers installment payments for credit card purchases, competes with alternative payments providers such as Affirm and Klarna. By adding debit card purchases this month, the company seeks to expand the market for prospective buyers.

But there are some compromises. Consumers can split a purchase of up to US$400 into three interest-free monthly payments on their debit cards, which is a more limited option than what Splitit offers on credit cards: the ability to split purchases of any size into 12 interest-free payments.

Federal Reserve research has indicated a growth in popularity of debit cards among U.S. consumers, particularly among debt-conscious millennials. According to the Federal Reserve’s 2017 update to its U.S. 2016 Payments Study, U.S. credit card payments rose by an estimated 10.2 percent in terms of volume and an estimated 6.3 percent in value between 2015 and 2016. The volume of U.S. debit card payments (including prepaid cards) rose by an estimated 6.0 percent from 2015 to 2016, while the value of debit card payments rose by an estimated 5.3 percent. U.S. debit card payments were estimated at 73.8 billion transactions worth $2.70 trillion in 2016, compared to estimated credit card payments of 37.3 billion worth $3.27 trillion in 2016, the Federal Reserve said.

"Splitit competes in a crowded field for U.S. installment loans, especially for e-commerce shopping, where PayPal has not only streamlined the payment checkout process but has the brand recognition and a huge merchant network that accepts it," said Raymond Pucci, associate director of Research and Consulting Services at Mercator Advisory Group. "Splitit has a shopper-friendly method that promises a smooth checkout—the key will be to sway enough merchants to sign up for this alternative payment service.”

The restricted terms for debit purchases may prove too much of a compromise for the budget-conscious millennials that Splitit targets, Pucci warns. “It remains to be seen whether the risk-return factors on the debit side of the market will make Splitit’s debit offering feasible or not.”

In the U.S., PayPal Credit has been one of the pioneers of installment payments for online purchases. Last year, PayPal agreed to sell the receivables in its PayPal Credit business to Synchrony Financial. The deal, which still awaits regulatory approval, is expected to close in the third quarter of 2018.

Gary Marino, PayPal’s EVP and chief commercial officer, said that merchants offering PayPal Credit and consumers using the service won’t see any changes following the sale.

According to Pucci, the business will likely still be branded as PayPal Credit. PayPal Credit was originally a business called Bill Me Later, which Marino headed. In 2008, eBay purchased Bill Me Later and combined it with PayPal, which eBay owned at the time.

“Two other installment loan players to watch are Affirm, which is a major U.S. alternative provider; and Klarna, which is Europe-based, but establishing a greater U.S. presence,” Pucci said.

Affirm also shares some DNA with PayPal. Affirm's founder, Max Levchin, was also one of PayPal's founders.

Last October, Affirm launched a mobile app that lets customers split big online purchases into smaller, fixed payments with a virtual credit card as an alternative to the accumulated debt and interest of bank-issued credit cards. The app enables consumers to make purchases even at online merchants who haven’t integrated Affirm’s technology.

Sweden-based Klarna enables customers to apply instantly for credit at the online checkout. Klarna settles with the merchant upfront and the customer reimburses Klarna, typically after they receive their purchased items. Klarna, which has grown rapidly in Europe, launched a U.S. business in September 2015.

“Buying on installment credit is quite popular in some European countries such as Turkey,” said Zilvinas Bareisis, a senior analyst at Celent. “Some Spanish banks have also been successful at encouraging their customers to utilize their existing credit lines on their credit cards by offering installment option via a mobile app at the point of sale. However, these are bank offerings based on existing credit arrangements.”

Gil Don, Splitit’s CEO, said the company’s technology helps banks generate more credit and debit card transactions and to compete with nonbank alternative payments providers such as Affirm or Klarna. He notes that alternative installment payment providers typically can be used only in their country of operation for domestic purchases, whereas Splitit is cross-border.

Splitit isn’t targeting Latin America, because of the high penetration of local installment payment services in countries across the region such as Brazil.

“We’re focusing on the U.S. and Europe, and see Asia-Pacific as an important market,” said Don. “We already have some merchants in Australia and Singapore, and are looking at China, Indonesia, Japan, Malaysia and Pakistan.”

Don said Splitit now has around 800 merchants using its solution, of whom 70 percent are based in the U.S. and the remainder in Europe. Splitit has an R&D center in Israel and an office in London.

“Around 95 percent of our merchants are online retailers,” said Don. “They are all sizes, ranging from merchants doing a small amount of business each month to merchants doing millions of dollars a month.”

Adding support for debit cards also brought on some risk, which necessitated the $400 limit.

“A debit card is linked to a bank account balance, and since we don’t know the customer’s bank account balance, we limit the purchase amount,” said Don. “Also, we see that Splitit debit card transactions tend to come from verticals with low average-order values, such as fashion, where the average purchase value is $75.”

Cosmetics or jewelry items can cost several hundred dollars, while typically still come in under the $400 level.

“We want to give millennials who don’t have high salaries the option of using their debit cards for buying fashion, cosmetics or jewelry,” Don said.

When Splitit adds its solution to the POS terminals in a brick-and-mortar store, it provides a virtual POS application which connects over the internet with the POS terminals.

In the U.S., Splitit has been working with Nova, a Miami-based processor, to implement Splitit software into the POS terminals of Nova’s merchant clients. Several of these stores have already gone live with Splitit, including booths selling cosmetics and jewelry in malls.

In April 2017, Splitit partnered with the open-source e-commerce platform Magento, enabling merchants to integrate Splitit’s monthly credit payment option into their checkout processes.

“We integrate via APIs with major e-commerce platforms such as Magento, Shopify, TrueCommerce, and Salesforce.com,” said Don. “Also, we have agreements with leading processors in the U.S. and Europe, such as Adyen, First Data, Global Payments and WorldPay."

Splitit doesn’t require issuers or acquirers to make any changes to their systems, but merchants have to download Splitit’s API. Splitit claims merchants adding its solution to their payments checkout options see tangible benefits to their business. “We have merchant clients in Europe who’ve seen an 80 percent-plus increase in average order value from using Splitit,” said Don.

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Point-of-sale Credit Debit cards Payment processing