Fintechs offering installment loans are attracting significant funding from investors who see opportunities in developed economies for consumer finance products, which are already well established in emerging markets.
Installment loans on credit cards became popular in Brazil in the 1980s due to high inflation. Now, installment lenders like Klarna, Splitit, Afterpay, and Affirm are leveraging technologies like real-time credit scoring to provide instant financing across digital shopping channels and in physical stores. They appeal to consumers in developed economies who are wary of revolving credit card debt, including digitally-favored American millennials, low-income consumers in Australia, and cash-favored customers in German-speaking countries.
Affirm having completed a $ 300 million financing round in April. This event, and $ 460 million raised by Klarna in August to expand its activities in the United States and enter Australia, highlighting the opportunities in the European, Australian and American markets.
In Australia, where 10% of the adult population has used “buy now, pay later” loans, investors are excited about installment lenders. In June, Australian market leader Afterpay raised A $ 317 million in equity on the Australian Securities Exchange and, so far this year, two US-based installment payment companies have made IPOs in stock exchange in Australia.
Sezzle, which operates only in North America, raised AU $ 43.6 million in July, while Splitit raised AU $ 30 million in January to finance its expansion in Australia and Asia-Pacific. Unlike its competitors, Splitit does not require consumers to apply for lines of credit, as it charges installment loans to their customers. existing cards.
The Commonwealth Bank of Australia (CBA) has invested US $ 100 million in Klarna as part of the August 2019 fundraiser, and became its exclusive Australian and New Zealand partner.
“CBA has a strong presence with Australian traders through its acquisition activity and could leverage this to offer Klarna to its traders,” said Brad Pragnell, director of 34 South 45 North Consulting. “Klarna presents a serious challenge for Afterpay in Australia, with Splitit, which uses Visa and Mastercard rails.”
PayPal sees a huge opportunity to stimulate competition in the installment payment market, according to Susan Schmidt, PayPal’s US vice president of consumer credit.
“We have not reached the level of penetration that we are aiming for over the next five years. PayPal Credit has over 2 million US Millennials in its wallet because this demographic does not use traditional credit cards like previous generations did, ”Schmidt said.
PayPal said in February that its PayPal Credit affiliate buy-now-pay-tard had processed $ 50 billion in total payment volumes in the United States since its 2008 purchase of Bill Me Later. Klarna’s US operations are growing at an annual rate of 6 million new US consumers and supporting 3,000 US merchants, Klarna spokesperson Aoife Houlihan said.
Afterpay has 200,000 customers in the UK, where it is known as ClearPay. In the United States, Afterpay is adding 50% more U.S. customers per day than its daily average during the year as of June 30, 2019, Afterpay said, without disclosing any details.
To avoid fintech disintermediation, JPMorgan Chase and Citigroup added installment loan features to their credit cards, while API pilot visa allowing issuers to extend installment payments to existing credit card customers at checkout.
Visa APIs enabling banks to offer installment loans, Mastercard’s April 2019 acquisition of finance provider POS Vyze and Amex ‘Pay it Plan it’ programs enable FIs to compete with fintech lenders “said Krista Tedder, Head of Payments Research at Javelin Strategy & Research. .
Installment payments represent 80% of online Brazilian credit card purchases and, according to ABECS (Associação Brasileira das Empresas de Cartões de Crédito e Serviços / Association of Brazilian Credit Card Issuers), 50% of total payment volume credit. Merchants charge customers’ cards monthly until the loan is paid off, or they may receive the full amount up front in exchange for a commission from their acquirer.
“The vast majority of installment loans are interest-free, but it is becoming increasingly common for Brazilian retailers to differentiate prices to compensate for the higher exchange on installment transactions,” said Guilherme Lima, CEO of Ponto Futuro Consultoria Estrategica.
Since March 2019, Brazilian banks have offered their credit card holders a new form of installment loan – a pre-approved line of credit – that does not require merchants to charge installments. Cardholders pay interest rates of 0.99% to 3.99% per month and pay off their loan in up to 36 installments. Merchants receive payment within five days.
Germany, Austria and Switzerland have a significant proportion of consumers who do not have a credit card or feel uncomfortable using their cards online due to security concerns. In Germany, according to Deutsche Bundesbank, credit cards accounted for 5% of the total value of payments in 2017, with cash accounting for 48%.
“The # 1 choice for online shopping in Germany, Austria and Switzerland is consumer billing, where people buy online, the product is shipped to them and they pay the bill within 30 days,” said Claire Gates, UK CEO. The Paysafe Pay Later business of the Paysafe group, which offers invoice payments and installment loans in Europe and the United States “It only requires them to reveal basic personal data such as name, date of birth and phone number or email address – this is enough for Paysafe to perform credit checks on them and authorize merchants to ship goods for payment on account.
The number of Australian buy-it-now and on-payment users increased from 400,000 in 2016 to 2 million in 2018, while the number of transactions increased from 80,000 in June 2016 to 1.9 million in June 2018.
“Forty percent of borrowers who buy now and pay later earn less than AU $ 40,000 per year, and current loan balances total AU $ 1 billion,” said Michael Swannell, managing director of KeyOne Consulting. in six are overdraft, delayed paying other bills, or borrowed more money to pay installments. “
Concerns over the growth of buy-now and late-payment loans in Australia have led to a regulatory investigation last year by the Australian Securities and Investments Commission (ASIC). In April 2019, a law was passed giving ASIC the power to regulate buy now-pay later providers.
“This will allow ASIC to protect at-risk consumers who have become overdrawn, delayed payments or have borrowed extra money to meet their payments,” Swannell said.