Consumers and merchants now have a wide range of options in offering installment payment options (also known as alternative financing). There are two main categories within this space. The majority of providers allow shoppers to apply for additional credit at the time of purchase. They differ in how they approve and then provide the underlying financing, as well as in the payment terms that are offered. Splitit serves as an alternative option. It uses available credit on the shopper’s Visa, MasterCard or UnionPay cards. Shoppers do not need to apply for additional credit and can check out seamlessly online or in-store by selecting Splitit as a payment option.
Among the application and approval providers, Klarna is a leading and globally recognized player in the consumer financing space. It is a regulated banking company headquartered in Sweden with an international headquarters in the U.S., and as such, it lends directly to consumers. It operates in 14 countries, with differing product options because of local regulations. Its offerings typically target order values under $1,000, with approval rates of approximately 50%. While options over $1,000 are available in some markets, approval rates decline to 37%. Interest rates are 18.9% in EMEA and the U.K., and 19.99% in the U.S.
Affirm is recognized as an industry leader in the U.S. It has achieved industry buzz with an innovative approach to making credit approval decisions using both a soft check of the borrower’s credit score and factors such as machine learning and the borrower’s social media activity to return an approval within seconds. For that reason, it is able to offer a higher approval rate than industry averages, i.e, 67% versus ~50%. Affirm only affects the borrower’s credit if payments are late, in which case it charges late fees of 1.5% and reports the delinquency to credit bureaus. It charges interest rates between 10% and 30% depending on its agreement with merchants.
Finally, Afterpay offers an interesting niche solution. It concentrates on the millennial shopper segment and is typically used for lower-order values than other installment providers. It can be used in Australia, Belgium, Netherlands, New Zealand, and the U.K. After the shopper applies and is approved for credit, a purchase is broken into four equal installments payable every two weeks. Instead of interest, Afterpay charges an $8.00 initial fee and an $8.00 fee for each payment.