Visa counters installment-loan fintechs with API for issuers

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Visa’s chief economist recently warned that fintechs are disintermediating banks’ credit card businesses with instant access to installment loans. Now Visa is looking to disrupt the fintechs by giving issuers a way to do the same.

Visa is piloting API-based technology enabling issuers to extend the option of an installment loan to existing credit card customers at checkout, adding to their choices for repayment, the San Francisco card network announced Thursday.

The move appears calculated to deter credit card customers from taking their business to online instant-financing powerhouses like Affirm and Klarna, which are rapidly spreading as popular options for consumers looking for alternative ways to pay for big-ticket items without weighing down their credit scores.

Visa is giving issuers a way to counter those forces through an API that delivers a range of alternative payment options to customers alongside their current credit card balance, Visa said in the release.

In 2010, fintechs held only about 1% of unsecured installment debt in the U.S., according to Visa analysis of anonymized personal loan data from TransUnion. But that number rocketed to 36% by 2017, and is estimated to have reached nearly 40% today, according to Wayne Best, Visa's chief economist.

When consumers move their spending to an installment loan provider, it muddies their risk profile, he said during SourceMedia's Card Forum in May.

“When you as a consumer move a balance from credit cards … to unsecured installment credit, it doesn’t weigh as heavily on your credit score,” Best said. “Let’s say I was a near-prime customer prior; now, that has bounced me into a prime category.”

Issuers can fight this trend by offering installment loans directly. Issuers using Visa’s installment loan solution may extend credit card customers an additional option to divide their purchase into smaller, equal payments over a defined time period for purchases in stores, online or while traveling, the release said.

Visa’s instant-financing approach would be more streamlined for existing customers, requiring no additional credit check or agreement, whereas online installment loan providers like Affirm typically require shoppers to provide their name, email, mobile phone number, birthday and the last four digits of their Social Security number.

Visa’s solution eliminates that step, removing another point of friction in the checkout process.

“Visa’s installment capabilities are changing the game by allowing issuers to leverage an existing payment account consumers already have and are familiar with, instead of asking them to submit to a credit check, download an app or open another line of credit,” said Sam Shrauger, Visa’s senior vice president of global issuer and consumer solutions, in the release.

Under Visa’s installment loan program, issuers also could give customers different terms for installment loans based on their risk parameters, and customers could opt to shift the installment loans back to the credit card balance later, if they preferred.

The markets where Visa is piloting the concept—India, Romania and Russia—offer a clue to its strategy for installment lending. These are zones where consumers aren’t as accustomed to piling purchases on to credit cards as they are in mature credit markets, and banks could use installment loans to build that behavior.

“We expect installments to become a foundational method of payment at checkout for both domestic and cross-border payment transactions,” Shrauger added in the release.

Visa isn’t the only traditional credit card provider to venture into installment loans. Chase next month is rolling out “My Chase Plan” to give banking customers the option to make purchases with an installment credit plan, and American Express in 2017 rolled out a similar approach called Plan It, Pay It.

Amex’s program enables credit card customers to split up payments for larger purchases into payment plans that are rolled into the total outstanding monthly balance.

The goal of these programs is to expand the base of credit card users and keep merchants happy with more options, including links to loyalty programs.

One analyst doubts whether traditional credit card lenders will see much traction in offering installment loans in the U.S.’s mature credit market.

“Some thin-file consumers might find easier terms with $300 and $500 point-of-sale financing, but in many cases they would be better off applying for a starter card from a major card issuer,” said Brian Riley, director of credit card advisory at Mercator Advisory Group, of Chase and Amex’s recent installment loan products.

Visa plans to roll out the solution broadly by early next year through its Visa Next hub.

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