Installment payment providers have gained a significant hold in the US market in the past year-and-a-half.
Some of this traction has been a result of the COVID-19 pandemic, which has created uniquely favorable conditions for accelerated growth. Experts believe that the industry can expect these players to enjoy further progress. Because of the economic conditions caused by the pandemic, more consumers are apt to look for budget-friendly payment options; likewise, more merchants will explore various ways to increase sales. Plus, with the volume of consumers and merchants engaged in e-commerce skyrocketing during the lockdown, there has been a sizeable expansion of the addressable market for installment payments. These factors indicate good business circumstances for more growth and M&A activity.
Installment payment options, including point-of-sale financing and “buy now, pay later” (BNPL) options, provide consumers with the flexibility to pay for a purchase in multiple installments over time. And in some instances, they can do so without accruing interest. This is an attractive alternative to paying in full at checkout.
Merchants are paid upfront by the installment provider, so this offers the likelihood of increased conversions and the potential for higher average order values (AOVs).
Installment payments are very well-suited for merchants in high-AOV categories, including those in electronics, travel, and furniture. Nonetheless, merchants in more traditional categories like apparel and fashion have also enjoyed good returns.
There is vast variety of players that occupy the installment payments market segment, including companies such as Klarna, Afterpay, Affirm, PayPal Credit, Splitit, Dividio, Sezzle, QuadPay, and Zip.
Installment payment options have been highly popular in markets like the Nordics and Australia for several years, and 451 Research says that momentum is now starting to grow in America. The United States is a giant e-commerce market, which saw $623bn in overall spending last year.
Adoption has been extremely strong with Gen Z and Millennial consumers. More than one in three consumers aged 18-37 has said that the availability of an installment payment option has influenced their decision to complete a purchase, according to 451 Research’s Q2 2020 Voice of the Connected User Landscape survey.
Another survey from 451 Research, the Q2 2020 Voice of the Enterprise: Customer Experience & Commerce, Merchant Study found that merchants are seeing an increase in demand for these services. More than 40% of online-centric merchants (with over 50% of their sales occurring online) are now offering this payment option at checkout. There is another 43% that are either in discovery, planning or considering adoption…this means that more market share is still in play and available.
The study also found that adding “flexible payment options” ranked as the top initiative among all merchant respondents for enhancing customer loyalty.
Some of the more notable examples of merchants offering installment payment options in the US today include Walmart, Sunglass Hut, Anthropologie, Abercrombie, Urban Outfitters, Peloton, Casper, and Warby Parker.
With the market opportunity for installment payments growing significantly, experts think that increased deal-making is likely to occur. One potential group of acquiring companies are credit card issuers that view installment payment offerings as a threat to their core business. Further, a large financial institution could benefit from buying an installment payments provider to move up the sales funnel and attract non-cardholders. Likewise, a private-label credit card issuer could se a return in acquiring installment payment capabilities to provide a white-label offering to its retail customers or in diversifying its business.
Some of the other potential buyers include payment processors that may be seeking to build out or deepen consumer proposition. To that end, there are said to be Australia-based installment payment providers that want to move into the US market. The Australian “buy now, pay later” (BNPL) services provider Zip Co agreed last month to acquire its American rival QuadPay. This expands the Aussie BNPL provider’s reach to more than 3.5 million customers and 26,000 merchant partners worldwide. Zip Co said that is wants to build a more than $1bn global payments company, which will operate in five countries (the United States, the UK, Australia, New Zealand, and South Africa). QuadPay is one of the first players in the American BNPL market and enjoyed rapid growth. The company marked a 33% increase in customer numbers in just last quarter.