Installment payments explained

Helping merchants drive sales and improve cash flow, and consumers boost their spending power between paychecks, installment payments are something of a win-win for businesses and their customers. It’s no wonder 45 million people in the US already use installments when making purchases.

Giving customers the option to pay in installments is especially useful if you want to court younger consumers. Klarna, an installment payment provider says that 70% of its customers are either Gen Z or Millennials, who are less likely to be able to afford expensive purchases - though older consumers are also starting to see the benefits. But does that mean all businesses should offer installment payment options?

Below we explain how installment payments work for merchants, the key benefits for you and your customers, and help you decide whether or not it's right for your business.

How do installment payments work?

Also known as Buy Now, Pay Later (BNPL), installment payment is a type of credit you can offer your customers that allows them to spread the cost of their purchase over multiple payments. Each payment is usually an equal portion of the total cost of the product and made at regular intervals.

Installment payments are commonly used for big ticket items, though they can be used for anything your customer wishes to pay for at a later date. They are especially attractive to consumers as only the merchant incurs fees for using the service.

Valued at $90 billion in 2020, the BNPL market is expected to hit a staggering $4 trillion by the end of this decade.

What are the different types of installment payment?

There are three main types of installment payments:

• Installment sales - an agreement between the merchant, and the customer allowing them to split the cost of their purchase into three or four smaller installments paid at regular intervals.
• Installment loans - your customer receives a loan from a third party in order to fund their purchase and then pays the loan back in installments, plus interest. This is usually for higher value items and the repayment period can be over months or even years.
• Pay later - the entire purchase cost is delayed for a period (usually between 14 to 30 days) and then repaid in full.
• Pay on delivery - your customer pays for goods after they have been delivered. An example of this is the service Splitit recently launched for AliExpress shoppers in partnership with Checkout.com.

Installment payments vs subscriptions

Both installments and subscription payments enable you to collect recurring payments from a customer. The major difference is that, with installment payments, there is a set balance that needs to be paid off by a particular date, whereas a subscription is an automatic recurring payment that you can keep collecting until the customer retracts their permission. Both types of payment have their uses for merchants. Installments are generally used for a one off purchase, while subscriptions are usually in exchange for the provision of an ongoing service.

Installments vs credit cards

Many consumers prefer paying in installments over credit cards because they find it more flexible and easier to make payments, and because it allows them to avoid credit card interest. However, while offering installment payments might be the difference between making or not making a sale, merchant fees can potentially be higher - ranging anywhere between 2% and 8% depending on the provider. In comparison you can expect to pay between 2-3% you pay for accepting credit card transactions.

Benefits of installment payments for merchants

The benefits of offering installment payments as a merchant are:

• Increased sales - installments payments solutions can boost average order value, repeat purchases and customer conversion, resulting in a higher overall revenue. They also improve loyalty, meaning more repeat customers and more repeat sales.
• Customer acquisition - offering the choice to pay in installments is a great way to attract new customers to your brand, especially Millennial and Gen Z consumers. Working directly with an installment payments provider such as Klarna, Affirm or Tamara exposes you to loads of potential customers through merchant directories, co-marketing initiatives, and featuring on their social media pages and apps.
• Offer better customer experience - installment payments provide a better experience for your customers, enabling them to pay in one click and store their account information making it easier to transact with new merchants that offer the same service.
• Improved cash flow - as you can collect the customer’s payment in full from the BNPL provider, there's no delay in settling payments, which is great for your cash flow.

Benefits for your customers

Here are the key benefits of installment payments for customers:

• Credit without a credit card - for younger consumers or gig workers, who might not be able to get a credit card, installment options allow them to access some of the same benefits without the interest.
• Increased spending power - paying in installments essentially boosts consumers’ spending power, allowing them to afford the higher ticket items that their monthly paycheck wouldn’t otherwise cover.
• Convenience - installment payments offer your customers a more convenient way to shop and can make it easier to budget.

Is offering installment payments/BNPL right for your business?

Who could argue with a better conversion rates and improving the shopping experience for your customers? Well, even despite those benefits, you should seriously consider whether installment payments are the right option for you and your customers. As mentioned earlier, there are some potential challenges to consider, such as higher fees and the risk of your customers overspending.

• Understand merchant fees - check what fees you’ll be charged by your installments provider so you can assess whether your sales will offset the cost. If you’re not 100% sure they will, your business might not be ready for BNPL.
• Match the plan to your price points - different providers offer different  types of installment payments. If you sell very expensive products, you will probably need to offer a solution with longer repayment terms, which requires a credit license. Lower cost items that can be be paid off interest-free in four installments or fewer are usually free from credit regulation.
• Understand how it will impact returns - BNPL can encourage returns as customers can try items and send them back without paying in full or waiting for a refund. Especially if you’re a fashion business, ensure you have the capacity to deal with an increase in returns.
• Check it’s suitable for your target market - installment payments cannot be used by consumers under the age of 18 and are less likely to be used by older customers. With that in mind, ask yourself whether your demographic is likely to use BNPL?.

Checkout.com can help your business accept more payment methods

If installment payments sound like they could benefit your business and you're ready to offer the method to your customers, Checkout.com can help.

Our Unified Payments API allows you to offer your customers’ most desired payment options, including digital wallets, global card schemes, and, of course, installments. Wherever you operate, we can help you find the most suitable local payment methods for the customers in your region. That means a higher conversion rate, happier customers, and boosted loyalty.

Discover our full range of payment methods and find out more.