NEW LONDON, Conn.–A small but growing number of consumers are turning away from credit cards and toward a fintech that allows them to make small retail purchases using installment plans. It’s a trend now dominated by fintechs, but some big financial players are looking to enter the space.
“Gone are the days when special financing plans were mostly reserved for big-ticket purchases like TVs and refrigerators,” reported the Wall Street Journal. “Now, sweaters, makeup or other everyday items can be paid for in installments with loans or other payment plans offered at checkout with thousands of merchants in the U.S., including Walmart Inc., Urban Outfitters Inc. and, soon, H&M. Some Amazon.com Inc. credit-card users can also sign up for these plans.”
It’s Got to be the Shoes
As an example, the Journal cited one person, Sean Gauthier, who said he would never think of using credit cards to buy sneakers. But Gauthier bought a pair of $140 pair of white, pink and green Nikes on the app of footwear retailer StockX, and then took advantage of an offer from financial-technology upstart Affirm Inc. that let him buy the shoes right away and pay for them over six months. The company charged him $5 in total interest.
What’s taking place, the Journal reported, is merchants and lenders tapping into the financial challenges many U.S. families are facing and the response by many consumers to borrow more money. As CUToday.info reported here, America’s middle class is piling on debt at record levels.
“The payment plans often resonate with young adults who are wary of carrying credit-card balances after watching their parents struggle with debt during the last recession,” the Journal reported. “Fintech companies such as Affirm, Afterpay Touch Group Ltd. and PayPal Holdings Inc. dove into these payment plans after that period, when banks pulled back on consumer lending.”
Strong Growth at Fintechs
Growth at some fintechs has been robust. Affirm’s point-of-sale loans, for instance, doubled to about $2 billion last year and are expected to at least double again this year, CEO Max Levchin told the Wall Street Journal.
While that amount is small when compared to the roughly $450 billion of spending limits on new U.S. credit cards that Experian PLC says were issued last year, the Journal noted more than half of merchants surveyed this year by advisory firm 451 Research said they already offered installment options or planned to adopt them in the next year. Nearly 40% of consumers surveyed said the ability to finance a purchase at checkout made it more likely they would complete a transaction, the report added.
Big Players to Enter Market
In addition, big financial firms, eager to expand their consumer lending, are getting in. JPMorgan Chase & Co., Citigroup Inc. and American Express Co. have introduced or are working on payment programs for cardholders that resemble installment loans.
“Say a borrower buys a $100 outfit,” the Journal offered as an example. “With a credit card, he will need to pay that off by the next due date or carry a card balance, which can last months if he makes only the minimum payments and racks up interest charges. With an installment loan, he pays a fixed amount with each payment—say, $25 each month over the following four months, or more depending on interest or other charges—and knows ahead of time what the total will be.”