Has instalment lending come of age?
As a concept, instalment payments are not new: as far back as the 1950s, consumers could purchase goods and make cash repayments over a period of time according to an agreed schedule. In recent years, instalments have made a big comeback across Europe, principally because they suit the way people live today.
Time-poor consumers are seeking the flexibility to make purchases without using traditional credit products and loans, which can involve complex application procedures and credit checks.
Despite some concerns raised by regulators and charities about the risks of unsecured lending, instalments look like they’re here to stay: indeed, their proponents argue they are essential as the global economy recovers from the ravages of COVID-19. To date, specialist fintechs such as Klarna and AfterPay have led this growth despite banks having many of the tools and relationships to get involved. So is it time for Europe’s banks to dive in?
Look East for answers
Although instalments fell out of favour in Western Europe during a period of rapid wage growth and low inflation in the 1960s, a number of regions globally continued to use them. In Latin America, instalment payments enabled consumers to hedge against rising costs during hyperinflation in the 1970s and 80s. Despite the relative stability of many Latin American markets today, instalments are still popular: in 2019, some 70% of Argentinians paid using instalments, according to market research firm D’Alessio IROL.
As in Latin America, South-Eastern European markets like Greece and Turkey were initially drawn to instalments during periods of high inflation or low household savings in the early 90s. However, Sertan Sener, Head of Visa Consulting & Analytics for South East Europe, says the instalments market has matured – and is now firmly embedded in credit card offerings, particularly for the younger generation: “Instalment payments are part of the natural evolution of card payments in South-East Europe. Especially with digital natives [those born after 1990], we will be seeing new ways of financing purchases linked to digital payments. Instalments provide consumers with the right level of flexibility and choice at point of sale.”
The popularity of instalments with digital shoppers is not lost on Serkan Ulgen, Executive Vice President at Yapi Kredi, Turkey’s first private bank to issue credit cards and one of the first to introduce instalments in the country. Since 2010, Yapi Kredi has continuously upgraded its instalments offering, including a card that offers either traditional credit purchases or instalment payments. From 2015, the bank has also offered the option to switch payments from credit to instalments after purchase completion. These upgrades are so popular that around a third of Yapi Kredi’s entire retail payments business now comes from instalment payments made both at physical check-out and digitally. “Instalments are a great deal for consumers”, says Ulgen.
“They enable higher-ticket purchases without complicated paperwork at the point of sale, and they’re easy to execute across any device – PC, laptop, mobile, or at Point of Sale (POS). Turkey’s young population1 is receptive to new propositions and offers that involve mobile and digital technologies.”
Not without challenge – or risk
Despite this positive picture, Ulgen acknowledges that developing Turkey’s instalment market has not always been plain sailing. While the benefits to consumers are clear, merchants were initially less enthusiastic. “Our pitch to merchants was to increase their sales volume while minimising their collection risk”, he notes. “Before instalments, merchants would sell goods based on promissory notes – but add the debt cost to the price of goods. Because we held consumers’ credit histories and bank accounts, we were able to remove the credit risk and debt costs from merchants, and offer them a clear pricing model.”
Although Turkey boasts a sophisticated credit bureau network, burgeoning volumes in both the credit and instalment markets led to increasing concerns about consumer indebtedness. Accordingly, the Turkish government introduced legislation in 2013 to limit credit card spending to four times a consumer’s income. The use of instalments has also been restricted, with product categories like fuel, groceries, restaurants and consumer technologies excluded from the option to pay by instalment.
From East to West – via North and South
In Western Europe, instalment payments began their resurgence around ten years ago. Their rise has been closely linked to the growth in digital commerce in the region, with companies like Klarna (founded in Sweden in 2005) and Australia’s AfterPay among the best-known players.
In Australia, AfterPay grew by offering retailers an online instalments option, with the introduction of a mobile app in 2017 leading to more rapid expansion. Today, AfterPay has around eight million users across the US, UK, Australia and New Zealand and revenues of more than A$500 million.
Like AfterPay, Klarna’s beginnings were modest enough: launched with a mission to simplify and secure online checkout, the company expanded into its more popular “buy now, pay later” and instalment payments offerings. Today, it handles more than $35 billion of business across 13 European markets, the US and Australia. For Alex Marsh, head of Klarna UK, instalments are beneficial not just to consumers, but also for the wider economy: “Consumers can buy what they want within a comfortable budget by spreading the cost of purchases for free. For the wider economy, we open up the advantages of credit – but in a way that’s controlled and manageable for consumers, thanks to a clear repayment structure.”
Marsh acknowledges recent concerns about responsible lending, noting that “the success of our business rests on our ability to make responsible lending decisions. We perform robust eligibility checks when consumers use Klarna. And we’ve invested in initiatives to help consumers with mindful spending, including KlarnaSense, which encourages smarter shopping.”
The rise of single-market specialist instalment players to become multi-billion-dollar international companies inevitably leads one to ask – what’s next?
Jeni Mundy, managing director of Visa UK and Ireland, says continued growth in instalments is consistent with a blurring of the distinction between debit and credit payments – and predicts we’ll see banks getting involved through partnership. “Credit and debit functions have been in place for decades. The question now isn’t so much which function gets used, but what the purchase looks like after the sale. Do I want to spend money I’ve got, or borrow? So there’s an extra dimension for consumers now – and instalments have a role to play, not just in giving consumers more choice, but also in helping merchants, acquirers and issuers to grow business volumes and deliver a wider range of services.”
It’s possible for banks to incorporate instalments into their offering by using consumers’ existing credit lines: this has the advantage that there’s no need to refer transactions for continuous credit checks and scoring. Visa works with Fintech partners such as Klarna, SplitIt and ChargeAfter on similar arrangements in the US and elsewhere which combine innovative fintech products with the bank’s knowledge of its customers’ credit history, income and spending patterns. Customers get the flexibility of instalment payments through their existing bank relationship, and merchants can reduce their credit risk while growing sales and profits.
Although the debate around responsible lending and instalments will continue, there’s no doubt that instalments will keep growing in popularity because they fit how consumers (and especially the young) live now.
Whilst instalments may not suit the product portfolio of every financial institution, their recent rapid growth suggests they are, at the least, a trend worth keeping up with.
1 A 2019 study referenced by Index Mundi shows that more than 40% of Turks are aged under 25: https://www.indexmundi.com/turkey/demographics_profile.html
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