Fintech Insights

Catching the installment solutions wave – The right way

Adam Mawdesley | vice president of Global Partnerships, Splitit

February 17, 2021

Buy now, pay later (BPNL) solutions had a stellar year in 2020. High-profile investments and partnerships brought providers into the headlines, while COVID-19 has caused many budget-conscious shoppers to seek flexibility in the way they spend.

As a result, merchants increasingly offer installment payment options to help them sell more. Doing so helps them improve critical metrics, including average order value, conversion rate and cart abandonment.

What is buy now, pay later?

BNPL, also referred to as installment solutions or alternative financing, allows consumers to purchase items by making multiple payments over time. Industry experts sometimes compare BPNL to layaway, but today’s crop of fintech-driven solutions allow consumers to receive their items after their first installment.

Within the installments category, there are essential differences between providers.

Applications and approval: There are two very distinct categories of BNPL providers. Most providers – including Klarna, Afterpay, Quadpay and Sezzle – often require the shopper to apply for approval and share personal data, including their Social Security number. Credit decisions are typically made by accessing credit reporting bureau data and other financial information from third-party data sources. Less commonly, such as with Splitit, shoppers can set up installment plans against their credit card with no application or account creation required.

Business models: Installment solution providers earn money in various ways. On the merchant side, they typically charge a combination of percentages and fixed fees per transaction, similar to other payment processors. They may also impose onboarding costs.

Some providers also monetize the consumer by charging variable annual percentage rates and late fees. Others, like SplitIt, do not charge fees or interest, although normal credit card fees apply. Merchants can risk customer fallout from blame for any costs or difficulties incurred, including credit report damage.

Consumer ease: Some BNPL providers have a multistep setup and account creation or application process. This can hinder conversion, especially in an increasingly mobile-centric world where any extra steps to any checkout come at a detriment to conversion. Look for providers who have the simplest flows with the least amount of data needed to ensure your user experience and conversion rates do not suffer.

How do consumers view installments?

Installment payment solutions have become a headliner in the world of payments and fintech in large part because of consumer adoption. Several studies help paint a picture of an increasingly ubiquitous and well-liked option.

Demographics: Installment solutions appeal to more than just millennials. A study from pymnts.com reported 87% of consumers aged 22 to 44 are interested in BPNL; furthermore, 40% of millennials and 57% of Gen Xers have already used one.

Engagement: When used effectively, BPNL can increase shoppers’ engagement with a particular retailer. Research carried out earlier in 2020 found that an installment option can encourage shoppers to purchase more expensive items or purchase more items overall.

Utilization: Recent research found that shoppers choose installment options to avoid paying credit card interest (39%) and make purchases that fall outside of their monthly budget (38%). Some installment solutions focus on younger users to help them afford low- to mid-priced items. Others, including Splitit, target more affluent and financially mature users who want to manage their cash flow and spend the credit they already have on higher-value orders like “investment” purchases such as fitness equipment, bicycles, luxury retail goods and mattresses.

How can merchants choose the right option for their business?

Merchants have many choices. In some cases, merchants can offer more than one option. In considering the best fit, merchants should always put the customer’s needs first, asking potential providers questions through a customer-centric lens.

What is the impact on the purchase and checkout experience?

Every additional step in the checkout process gives shoppers the opportunity to abandon their transaction. With over 70% of shoppers leaving online shopping carts behind, any factor – such as added steps or requests for sensitive personal information – can hurt conversion rates.

Similarly, approval rates can result in a negative experience for some . Moreover, approval rates can fluctuate significantly depending on macroeconomic risk factors, such as COVID-19. When approval rates change, customers can have an inconsistent experience with providers that approve them for one purchase and then reject them for the next. In either case, the negative experience lowers their satisfaction and likelihood of returning to the same merchant for future purchases. Cost and transparency also has an impact: If the fees and terms are not divulged until the last moment, customers may experience sticker shock and abandon their purchases.

How well does the solution fit with the product categories on offer?

Installment solutions may work well for merchants who offer low-ticket items with small-basket orders. With higher-ticket items and orders, merchants should ask providers about various plan features, including installment plan maximums, frequency of payments and the ability to choose the number of installments. For example, four installments payable in two-week increments could work well for a $200 order but not a $2,000 order, because the period of the repayments may not make the purchase any more affordable for the customer.

The takeaway

The number of available solutions means merchants should do careful thinking and ask tough questions before choosing what to offer. Reviewing the options and putting shoppers first helps avoid confusion, cost and revenue loss.

That said, the time is now for merchants to consider adding installment payment solutions. Both the amount of innovation in the market and the level of consumer demand raise the stakes for acting sooner rather than later.

If you are interested in learning more about the Splitit solution, we invite you to contact us today.

*Splitit is a Worldpay partner.