Open-loop credit card instalment payments have been available in Argentina, Brazil, Greece, Israel, Mexico and Turkey for 20-30 years; now Israeli fintech firm Splitit is introducing the concept in the UK and the US. Robin Arnfield finds out more about this innovative concept attracting a significant amount of consumers
Israeli fintech firm Splitit hopes its software will spur retailers to allow consumers to pay for large purchases by instalment on existing MasterCard and Visa credit cards. Merchants can offer zero-percent point-of-sale financing at no risk to themselves and without consumers needing to apply for new lines of credit, Splitit’s CEO Alon Feit tells CI.
Paying by instalment for large-ticket purchases on standard MasterCard and Visa credit cards is a new concept in the UK and US. But in Argentina, Brazil, Greece, Israel, Mexico and Turkey, merchants have offered this facility for 20-30 years, and it has proved very popular with consumers.
"In the six countries where it has been available, open-loop credit card instalment payments vary from 35% to 60% of total credit card spending," says Feit.
Feit has 25 years’ experience in the credit card industry, including working as managing director of Israeli retail credit card issuer Shufersal Finance and executive director at the credit card subsidiary of Brazil’s Itaú Unibanco.
Unused credit lines
Formerly called PayitSimple, Splitit enables consumers to pay for point-of-sale and e-commerce purchases using their existing credit cards, unused credit lines, dividing the cost across as many interest-free payments as they choose.
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Cardholders have no need to complete credit applications or qualify for new credit lines. According to the Federal Reserve, 70% of US credit card lines are unused.
"My view is: why create a new credit line when there is so much unused capacity on existing credit card credit lines?" Feit says.
"Merchants offering Splitit to their customers enjoy increased sales, higher average tickets, and increased conversion rates."
Splitit, which has offices in Jerusalem, New York and London, has rolled out its technology in the UK, US and Canada.
The company has raised $5m in financing and is in the process of closing a $15m funding round.
"We’re currently studying the local payments regulations before moving into Continental Europe," says Feit.
What the consumer wants
In June 2016, Splitit released the results of a consumer credit card trend survey based on the responses of over 1,000 US credit card-holders.
Splitit’s survey found that, when credit card users are offered interest-free instalments on their existing credit cards with no credit check or application process required, 54% prefer instalments over free shipping. Similarly, 53% of credit card-holders favour instalments over a 10% discount.
Among credit card-holders, consumers with annual salaries of $100,000-150,000 prefer interest-free instalments over incentives, with approximately 60% of this group preferring instalments.
The survey also found that 40% of credit card users would increase the size of their purchase by at least 10%, if offered interest-free instalment payments.
The Splitit survey found that 50% of US credit cardholders have used store cards and 42% have used PayPal Credit as instalments-based payment methods in the past.
When a customer pays via Splitit, they authorise a hold to be placed on their card for the outstanding balance on the item they are purchasing. If one of their monthly instalment payments is declined, after a seven-day grace period, their card will be charged the full amount.
"Splitit is different from traditional instalment payment/layaway payment programs in the US," says Aite Group Senior Analyst Thad Peterson.
"So merchants need to clearly explain the idea to the customer at the time of purchase, and the customer needs to understand the distinction between Splitit and traditional programs. But Splitit is a win for merchants and customers. For merchants, it increases the opportunity to sell by lowering the barrier to purchase.
"It provides a way for consumers to buy on instalment with the potential of no incremental interest, provided the customer doesn’t revolve on their payment card."
In addition to traditional sources of consumer financing such as private-label store cards, Splitit competes with new entrants such as PayPal Credit (formerly called Bill Me Later), Affirm, which is led by PayPal co-founder Max Levchin, and Klarna.
"We increase credit card volumes and bring high-ticket transactions back to the credit card ecosystem which would have otherwise gone to store cards or newcomers to the instalment payments market," says Feit.
"Solutions such as PayPal Credit and Affirm require consumers to apply for a new credit line and undergo a credit check, which downgrades their credit rating.
"If they pass the credit check – and approval rates are only 50% – they get a new credit line with its own billing cycle offering high charges if they miss payments."
Splitit’s solution doesn’t require issuers or processors to make any changes to their systems or to implement any software. However, retailers need to implement Splitit’s API (applications programming interface) on their checkout terminals.
"What Splitit offers is out-of-the-box software which doesn’t require anyone to change their ecosystem," says Feit.
In the fourth quarter of 2015, Splitit achieved the highest level of compliance for PCI DSS (Payments Card Industry Data Security Standard), the company says.
Splitit markets its software to merchants via processors and independent sales organisations (ISOs) which resell processors’ services to their clients. "We have integrated with over 100 processors and gateways which cover 90% of UK and US merchants, and have signed reseller agreements with over 30 ISOs to distribute our solution to their client base," says Feit.
"Our platform is certified by Chase Paymentech, First Data, TSYS, Authorize.net and Elavon."
For the basic Splitit service, where they get their money in instalments, merchants pay 1.5% of the purchase price plus $1.50 per instalment.
For the full service, where they receive the full purchase amount up-front, merchants pay $1.00 per instalment and 3%for up to three instalments, 4.5% for 4-6 instalments, and 7.5% for 7-12 instalments. Splitit shares its revenues with its payments partners, the company says.
"We have over 300 online and bricks-and-mortar retailers as well as dental clinics accepting Splitit," says Feit.
Online merchants accepting Splitit payments include Prime Style, IFN Modern, HID Evolution, Elevatione and Glasses USA.
Splitit offers a specific solution for the US healthcare industry. "Medical clinics offering elective procedures such as dentists and plastic surgteons are very interested in interest-free instalment payments for patients," says Feit.
"But the existing solutions for medical clinics such as CareCredit, provided by Synchrony Financial (ex GE Money), are very expensive for clinics."
Feit says a quarter of working-age US adults struggle to pay their healthcare bills, leading many people to avoid future treatment and resulting in financial losses for medical and dental practices.
"Splitit Healthcare changes the paradigm by making medical expenses more manageable and affordable for patients while helping practices maximise revenue and offer a better service to patients," he says.