Why Visa and Mastercard are suddenly in the mood for installment loans
The heavyweights of the financial industry are taking note of the rapid rise in new credit options that offer buyers an alternative to the decade-old credit card.
PayPal, Visa, Mastercard, and Citigroup have all recently taken steps that reflect the impact of emerging products like Affirm, Afterpay, and Klarna.
These credit products, often grouped under the “buy now, pay later” umbrella, allow buyers to make fixed installments instead of using a revolving credit line.
Earlier this week, San Jose, Calif.-Based PayPal, which has long been offering a line of credit to online shoppers, announced a new option called Pay in 4 on purchases ranging from $ 30 to $ 600 with four interest-free payments over a six-week period.
Last week, San Francisco-based Visa announced one partnership This is to enable buyers in India to make installment payments when swiping Visa-branded cards. In July, Visa and Silicon Valley-based ChargeAfter revealed a similar pilot in the USA
And on Monday, Mastercard of Purchase, NY, announced a partnership with QuadPay, another company offering 0% financing for small dollar purchases that borrowers pay off in four installments.
“This is a new choice for consumers,” said Mitch Ferro, CEO of Mastercard Vyze, which offers participating merchants a selection of credit offers to offer to specific customers. “I think it’s just a really easy product for the consumer to understand.”
The new wave of installment loan products can help merchants increase their sales. The benefits to consumers are less clear.
Consumers typically pay either 0% or a lower interest rate than credit cards. However, default interest can pose a risk to borrowers who cannot afford their payments. The installment loans can also add to the total consumer debt. In one current survey of American from personal finance site The Ascent, 14% of respondents said they used “buy now, pay later” services because their credit cards were maxed out.
Established companies in the consumer finance sector are also faced with a tricky calculation. Payment networks like Visa and Mastercard receive a small part of every transaction, regardless of whether it is a traditional credit card or an installment loan from the digital age. Card-issuing banks that collect interest when buyers restructure their debt may have the most to lose.
But these banks are now under pressure to respond to the rapid growth in installment loans, boosted by the recent surge in e-commerce transactions during the pandemic.
“It is clearly starting to drill into banking,” said Andrés Ricaurte, senior vice president of technology services company Mphasis.
Banks that issue branded credit cards, especially cards that can only be used at a specific retailer, may face the most imminent threat. Such cards have traditionally been used more often by relatively poor credit customers, a target audience that intersects with the young adult segment often addressed by businesses as “buy now, pay later”.
In a July research note, Jefferies analyst John Hecht found that pedestrian footfall at traditional brick and mortar retailers, key partners of banks specializing in private label credit cards, fell sharply in the second quarter of this year.
“While retail sales are declining during the pandemic, e-commerce is flourishing,” Hecht wrote. He argued that online point-of-sale finance from companies like Affirm and Afterpay is becoming increasingly popular over time.
The rise of digitally focused installment lenders gives buyers more choice than before, said AJ Stocker, former executive at credit card issuer Alliance Data Systems.
“In my opinion, this is just one more option to choose from depending on your situation,” said Stocker, who is now VP of Strategic Consulting at Kobie Marketing.
Ricaurte, a former executive at American Express, argued that banks that issue credit cards are not well positioned to make quick credit decisions like their new competitors, in part due to the structure of their data and the way their risk policies work is.
In contrast, aspiring lenders use a limited amount of information their potential clients provide, as well as insights from their users’ digital footprints, to help them make real-time decisions about whether to approve an application, he said.
“You have a lot of very recent data that some might argue is more relevant than if you were insolvent three years ago,” Ricaurte said.
One bank that has started to adapt is Citi. Last month, the New York-based bank announced that it would allow eligible credit card holders to split the cost of most Amazon purchases over $ 100 into equal monthly payments.