Should your business offer installment payments?

Giving customers the ability to pay off purchases over time could boost your business, but it does come with some risks


Paying in installments is growing in popularity, especially with young people. Offering it could help you grow your customer base, but it does come with some drawbacks. Here’s what you need to know.

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Many small business owners are looking for new ways to attract customers after enduring months of pandemic-related business restrictions. One way that has been successful for many is by offering installment plans. This isn’t a new idea, but it is gaining in popularity.

A survey just released by the trade publication PYMNTS and PayPal found that interest in buy-now-pay-later is particularly high for younger consumers. While only 6.4% of consumers currently use them, 11.5% of younger millennials do. And among millennial respondents, 40% said they would be open to using buy-now-pay-later options if they were more widely available in digital wallets, which are particularly popular with younger consumers.

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What do consumers like so much about buy-now-pay-later options? The survey found that the top reasons were the clarity on fees and interest rates, the ability to monitor spending, convenience and the number of merchants who accept this type of payment. Buy-now-pay-later merchants generally don’t charge interest, but some charge interest for missed payments or a flat fee for late payments. Sometimes the penalties consumers must pay for missed payments can be steep. PayPal Credit, for example, charges up to $40 for late payments.

Installment plan providers

A growing army of installment plan providers from the fintech world is paying attention to this increasing popularity. They include Affirm, Afterpay, PayPal Credit, Sezzle, Shop Pay Installments, Splitit, Square Installments, Openpay and QuadPay. These buy-now-pay-later platforms give merchants the ability to offer customers the option of breaking up a purchase into several payments, instead of paying for it all at once.

Most buy-now-pay-later providers target consumers. Some have set up online marketplaces where consumers can shop with merchants who offer their installment plan. However, Splitit also offers a B2B option, Splitit Business Payments, for corporate buyers who want to pay with a credit card. The sellers put a hold on the buyer’s credit card for the invoice amount. Once goods are shipped, the monthly payments start getting charged to the customer’s account. The advantage for merchants is they get paid for the whole order upfront, improving cash flow.

See related: Buy now, pay later with installment payment services

How will installment plans impact your business?

So who is paying for these services? It’s the merchants, who must pay the providers a commission. According to the journal PracticalEcommerce, commissions range from 2% to 8%, with some platforms charging merchants a flat fee of 30 cents per transaction. It is important for merchants who plan to offer a buy-now-pay-later option to consider that. In comparison, the fee to accept Visa and Mastercard credit cards averages 2.25%.

That said, many merchants do want to capture sales from consumers who don’t want to put charges on their credit cards or don’t have credit cards. There’s another big reason: Merchants don’t face the risk of chargebacks or fraud. The buy-now-pay-later providers generally assume those risks, according to PracticalEcommerce. Accepting buy-now-pay-later may also help merchants to build their business credit profile. As Equifax recently pointed out, some of the fintechs in this space are sharing merchant data with Equifax to help them build up their commercial credit file.

Installment plans offered by credit card issuers

The credit card industry is paying attention to the buy-now-pay-later trend. American Express now offers the option Pay It Plan It on select cards—the American Express® Green Card, American Express® Gold Card and The Platinum Card® from American Express.

Consumers can use “Pay It” to pay for smaller purchases of less than $100 throughout the month. If they want to break up large payments of $100 or more into equal monthly payments, they can use “Plan It” to break up their purchases into equal monthly payments for which they must pay a fixed fee. There is no interest.

Meanwhile, Chase offers My Chase Plan, which lets consumers pay a purchase over time for a set fee. Making customers aware of these options is a way to dip a toe in the water of buy-now-pay-later without signing on with a provider.

However, not all credit card companies are enthusiastic about the trend. Capital One has halted the acceptance of buy-now-pay-later transactions on its credit cards, citing risks for both customers and banks, according to Reuters.

Bottom line

The trend toward buy-now-pay-later payments seems like it is likely to pick up steam as the pandemic continues. If you’re a merchant looking to increase sales, staying current on it seems like a very good idea, even if you’re not ready to take the plunge now.

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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