Installment lending: what's old is new again

Installment lending is enjoying a renaissance, fueled in part by consumer pushback over the high cost of credit card purchasing. Visa and Mastercard are angling to support these types of loans, which are variously described as point-of-purchase financing and point-of-sale installment loans. So, too, are Square and a handful of other financial technology firms.

Affirm, a fintech founded by PayPal co-founder Max Levchin, was reported to have processed more than $2 billion in POS installment loans for customers of 128 stores and ecommerce sites in 2018. In February 2019, Affirm partnered with Walmart to support POS installment loans on purchases ranging from $150 to $2,000 at nearly 4,000 Walmart Supercenters nationwide.

"Shoppers looking for new ways to pay and merchants looking to sell higher ticket items and deter abandonments has driven a flurry of activity in the 'buy now, pay later' market," said Raymond Pucci, director of the merchant services practice at Mercator Advisory Group.

Globally, POS installment purchases represented $1.2 trillion in payments volume in 2017, and they have been growing 15 percent year-over-year, according to Euromonitor International. Mastercard, citing a study by Accenture, said POS installment loans represent a $1.8 trillion market opportunity.

Divido, a tech firm that developed a white-label platform to support this type of lending, estimates a typical U.S. lender would be able to drive more than $400 million in new revenues with POS installment loan programs over the next 12 months. Headquartered in New York, Divido's financial backers include Mastercard and American Express Ventures.

Popular with debit and credit cardholders

"The structure of an installment plan is very attractive to debit cardholders," said Jaclyn Holmes, director of Auriemma Research. "And while credit cardholders have the option of paying off their card balances at their leisure, they, too, clearly have an appetite for something a bit more concrete."

A recent survey by Auriemma revealed that six in 10 debit cardholders consider POS installment loan plans attractive, but only 28 percent of debit cardholders said they have been offered an installment plan in store; 45 percent said they had been offered one while shopping online. Better than 40 percent of debit cardholders reported enrolling in at least one POS installment plan. Among credit cardholders, just 17 percent of those surveyed said they had received an offer; 51 percent of those had taken up the offers.

Not surprisingly, big-ticket items like electronics, home appliances and furniture top the list of purchases placed on POS installment plans, but nearly a quarter of research respondents used the products to purchase clothing and 17 percent use the plans to pay for online shopping carts of various items, Auriemma said.

"Whether for purchases large or small, installment plans are redefining how consumers view affordability, particularly for those without credit cards," Holmes said. "Some cardholders find the uncertainty and responsibility of paying back money borrowed on a credit card intimidating, whereas installment plans provide a clearer path and time frame for repayment."

Visa builds as Mastercard acquires tech

In June 2019, Visa disclosed it will soon start piloting a suite of POS installment loan solution APIs with a select group of card issuers and merchants. If all goes according to plan, Visa said, the APIs will become widely available early in 2020. Visa issuing banks will hold the resulting loans on their balance sheets and will dictate the payment periods, interest rates and other terms.

"We expect installments to become a foundational method of payment at checkout for both domestic and cross-border commerce payment transactions," said Sam Shrauger, senior vice president, and global head of issuer and consumer solutions at Visa.

In April of this year Mastercard acquired Vyze, a fintech that supports various financing options, including POS installment loans. Vyze works with several major retailers and brands, including Home Depot and Microsoft, connecting them and their customers with a pool of potential lenders.

"Both consumers and businesses want the best choice and service, exactly when they need it," said Blake Rosenthal, Mastercard executive vice president. "Vyze adds to our ability to empower banks and other lending partners to participate in the growing trend of retail financing. The combination of their platform with our technology and network complements our existing payments programs."

Both actions follow the 2018 launch of Square Installments, a POS installment loan product geared toward small merchants. Square, in launching the new service, said a survey of U.S. consumers found strong demand for POS installment loans. Sixty-eight percent said they would be more likely to consider shopping at a small or local business if it offered such a financing option.

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