Installment payment providers have gained meaningful traction in the US market over the past 12-18 months. COVID-19 has created uniquely favorable tailwinds for these players that should accelerate progress further. As a result of the economic consequences of the pandemic, more shoppers are likely to seek budget-friendly payment options, and more merchants are likely to pursue different avenues to increase sales. Further, with the volume of consumers and merchants engaged in e-commerce increasing during the lockdown, significant expansion of the addressable market for installment payments has occurred. These forces all bode well for further growth, as well as M&A activity.
COVID-19 may accelerate adoption of installment payments
What are installment payments?
Installment payment options (including point-of-sale financing and ‘buy now, pay later’ options) give consumers the flexibility to pay for a purchase in multiple installments over time – in some cases, without accruing interest – instead of paying in full at checkout. For merchants (who get paid upfront by the installment provider) this offers the prospect of increased conversions and the potential for higher average order values (AOVs). Installment payments are particularly well-suited for merchants in high-AOV categories like electronics, travel and furniture, but have also shown results in more traditional categories such as fashion and apparel.
A wide variety of players occupy the installment payments market segment. Examples of providers include Klarna, Afterpay, Affirm, PayPal Credit, Splitit, Dividio, Sezzle, QuadPay and Zip.
What is the state of adoption?
Installment payment options have been highly popular in markets like the Nordics and Australia for some time. 451 Research’s surveys suggests that momentum is now beginning to build in the US – a massive e-commerce market, with $623bn in overall 2019 spending. Adoption has been particularly strong among Gen Z and Millennial consumers. More than one in three consumers aged 18-37 say 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.
451 Research’s Q2 2020 Voice of the Enterprise (VotE): Customer Experience & Commerce, Merchant Study indicates that merchants are taking note of increasing demand. Over 40% of online-centric merchants (more than half of sales occurring online) are now offering this payment option at checkout, and another 43% are either in discovery, planning or considering adoption – meaning more market share is still up for grabs. The study also revealed that adding ‘flexible payment options’ ranked as the top initiative among all merchant respondents for deepening customer loyalty. 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.
Where could M&A develop?
With the market opportunity for installment payments broadening, increased dealmaking is likely to develop. A potential group of buyers are credit card issuers that view installment payment offerings as a threat to their core business. A large financial institution could benefit from buying an installment payments provider to move up the sales funnel and court non-cardholders. Similarly, a private-label credit card issuer could benefit from adding installment payment capabilities to serve up a white-label offering to its retail customers, or diversify its business. Other potential suitors include payment processors that may be looking to build out or deepen consumer proposition and Australia-based installment payment providers that are looking to expand into the US market (e.g., Zip Co’s acquisition of QuadPay in June 2020).