Insights / Financial Services Law Advisor
The Evolving Market for Purchase Installment Plans
06.12.19
Over the past couple of years, consumers have seen a proliferation of installment payment plans to finance the purchase of goods and services. At a high level, these plans are designed to help consumers pay off large purchases in substantially equal payments (typically monthly) amortized over a specific duration (for example, 6, 12 or 24 months). A number of fintech companies have been offering these plans at online retailers' point-of-sale as an alternative to a standard credit card transaction. To compete, credit card issuers have begun introducing or expanding their own installment plan features on open-end credit card accounts.
The proliferation of these plans is being driven in large part by an increased consumer desire for innovative financing products, millennials' growing disengagement from traditional credit offerings,1 and retailers' continued efforts to develop lower-cost and less burdensome financing arrangements. The growing number of plans in the market is also emblematic of the continued efforts of large banks to compete with upstart fintech companies with savvy marketing and the fintechs' efforts to push big banks for dominance in the personal finance space.
Indeed, Americans are flocking to point-of-sale financing products like never before. One research report from May 2015 placed the potential market opportunity for point-of-sale financing at $391 billion.2 Just four years later, in April 2019, Accenture placed the number at $1.8 trillion,3 and Mastercard noted an annual growth rate of 20%.4 At the same time, the unsecured personal loan market – a similar market where banks and fintechs are increasingly competing with each other – rose to an all-time high of $138 billion in 2018, driven in large part by fintech companies. Within just five years, fintech's share of loan originations has risen from 5% to 38%, while traditional banks' share of originations has fallen from 40% to 28%.5
These trends have been aided by the Office of the Comptroller of Currency's more recent push to advocate for bank involvement in the short-term, small-dollar loan environment. Comptroller Joseph Otting has indicated his desire "to get national banks back into that space," after the CFPB's earlier efforts to curb such attempts. The OCC formalized this advocacy in a 2018 bulletin but also reminded national banks of core lending principles for "prudently managing the risks associated with offering these types of loans." Big banking has responded to these regulatory changes by offering their own versions of installment plans to compete with smaller, more reactive, and less highly regulated competitors, hoping to leverage their resources and customer base to reclaim some of the relevancy they lost to their fintech competitors.
The specifics of these installment plans vary with each credit card issuer. While some plans only allow for financing particular purchases, for example, others allow for a customer to create an installment plan for portions of their general account balance. Additionally, the timing of when a plan may be used can vary; some issuers enable customers to authorize available credit on their accounts to finance new purchases at point-of-sale, while others require that customers first make the purchase and have the amount show up on their account balance before then providing options on how to refinance it as an installment plan. Plan balances are typically amortized over a selected repayment period that might range from several months to several years. Other characteristics may include minimum plan amounts, caps on the number of plans on an account at one time, or purchase exclusions such as cash, cash equivalents or fees.
Because there is already a cardholder relationship with the consumer, credit card issuers have the competitive advantage of being able to offer these plans without the formal application required by many fintech offerings that rely on new acquisitions or a "closed-end credit" financing model. In fact, credit card installment plans are often structured to allow consumers to borrow against unused portions of their existing line of credit.
The most important difference among these plans, however, is in how issuers have priced the portion of the balance making up the installment plan. Some issuers require payoff of the installment balance through monthly plan fees. Other issuers treat installment balances in a way more akin to promotional balances, where the balance is to be paid off over a fixed duration, subject to a fixed APR during that time.
A credit card issuer's decision on how to structure its installment plans within a credit card account will implicate a variety of considerations under Regulation Z, most importantly those provisions implementing the CARD Act of 2009. The CARD Act and its regulations were meant to ensure enhanced consumer protections, such as awareness of account changes, and to facilitate consumers' paydown of revolving balances. Ironically, these same regulations are today making it difficult for credit card issuers to provide consumers with the types of competitive, flexible financing products currently in demand. Therefore, when designing credit card installment plans, credit card issuers must be careful in order to avoid inadvertently running afoul of Regulation Z requirements while competing in the rapidly evolving market for alternative financial services.
Additionally, the introduction of installment plans within a traditional credit card product may require changes to a card agreement, statement messages, product pages, FAQs, etc. An issuer should ensure that all of these are sufficiently clear in explaining how the plan works in order to address potential concerns of unfairness or deception that may arise depending on the complexity of an issuer's particular plan.
The proliferation of these plans is being driven in large part by an increased consumer desire for innovative financing products, millennials' growing disengagement from traditional credit offerings,1 and retailers' continued efforts to develop lower-cost and less burdensome financing arrangements. The growing number of plans in the market is also emblematic of the continued efforts of large banks to compete with upstart fintech companies with savvy marketing and the fintechs' efforts to push big banks for dominance in the personal finance space.
Market Drivers
For traditional credit card issuers, the offering of installment plans within a credit card account has become a big part of the push for fintech prominence. These innovations are designed to entice customers with flexible financing options that they might previously have sought from fintechs with sleek user experiences. More traditional customers, who are more familiar with store-branded credit cards with 0% interest promotions to finance large purchases, may also be drawn to these installment plans as a more stable method of paying off large purchases without worrying about potential balloon interest payments at the conclusion of the promotional period.Indeed, Americans are flocking to point-of-sale financing products like never before. One research report from May 2015 placed the potential market opportunity for point-of-sale financing at $391 billion.2 Just four years later, in April 2019, Accenture placed the number at $1.8 trillion,3 and Mastercard noted an annual growth rate of 20%.4 At the same time, the unsecured personal loan market – a similar market where banks and fintechs are increasingly competing with each other – rose to an all-time high of $138 billion in 2018, driven in large part by fintech companies. Within just five years, fintech's share of loan originations has risen from 5% to 38%, while traditional banks' share of originations has fallen from 40% to 28%.5
These trends have been aided by the Office of the Comptroller of Currency's more recent push to advocate for bank involvement in the short-term, small-dollar loan environment. Comptroller Joseph Otting has indicated his desire "to get national banks back into that space," after the CFPB's earlier efforts to curb such attempts. The OCC formalized this advocacy in a 2018 bulletin but also reminded national banks of core lending principles for "prudently managing the risks associated with offering these types of loans." Big banking has responded to these regulatory changes by offering their own versions of installment plans to compete with smaller, more reactive, and less highly regulated competitors, hoping to leverage their resources and customer base to reclaim some of the relevancy they lost to their fintech competitors.
Installment Plans on Your Credit Card
Installment plans offer consumers the ability to manage their debt by agreeing to substantially equal payments each month for a set period of time, in contrast to traditional credit card financing where the minimum payment and interest charges may be difficult to predict.The specifics of these installment plans vary with each credit card issuer. While some plans only allow for financing particular purchases, for example, others allow for a customer to create an installment plan for portions of their general account balance. Additionally, the timing of when a plan may be used can vary; some issuers enable customers to authorize available credit on their accounts to finance new purchases at point-of-sale, while others require that customers first make the purchase and have the amount show up on their account balance before then providing options on how to refinance it as an installment plan. Plan balances are typically amortized over a selected repayment period that might range from several months to several years. Other characteristics may include minimum plan amounts, caps on the number of plans on an account at one time, or purchase exclusions such as cash, cash equivalents or fees.
Because there is already a cardholder relationship with the consumer, credit card issuers have the competitive advantage of being able to offer these plans without the formal application required by many fintech offerings that rely on new acquisitions or a "closed-end credit" financing model. In fact, credit card installment plans are often structured to allow consumers to borrow against unused portions of their existing line of credit.
The most important difference among these plans, however, is in how issuers have priced the portion of the balance making up the installment plan. Some issuers require payoff of the installment balance through monthly plan fees. Other issuers treat installment balances in a way more akin to promotional balances, where the balance is to be paid off over a fixed duration, subject to a fixed APR during that time.
A credit card issuer's decision on how to structure its installment plans within a credit card account will implicate a variety of considerations under Regulation Z, most importantly those provisions implementing the CARD Act of 2009. The CARD Act and its regulations were meant to ensure enhanced consumer protections, such as awareness of account changes, and to facilitate consumers' paydown of revolving balances. Ironically, these same regulations are today making it difficult for credit card issuers to provide consumers with the types of competitive, flexible financing products currently in demand. Therefore, when designing credit card installment plans, credit card issuers must be careful in order to avoid inadvertently running afoul of Regulation Z requirements while competing in the rapidly evolving market for alternative financial services.
Additionally, the introduction of installment plans within a traditional credit card product may require changes to a card agreement, statement messages, product pages, FAQs, etc. An issuer should ensure that all of these are sufficiently clear in explaining how the plan works in order to address potential concerns of unfairness or deception that may arise depending on the complexity of an issuer's particular plan.
Conclusion
The growth of installment plans has made clear that there is enormous consumer appetite for more purchase financing options. The OCC's new regulatory stance may presage further and more innovative attempts at providing consumers with non-standard credit card lending options. Banks will likely continue to respond with new products in this area in an attempt to stay ahead of fintechs, which have already managed to carve out their own strong presence in this space.
DWT will continue to monitor further developments in this area, and will report on them from time to time.
1 http://fortune.com/2018/02/27/why-millennials-are-ditching-credit-cards/
2 https://filene.org/learn-something/reports/blue-ocean-lending-for-credit-unions-point-of-sale-financing
3 https://pointofsale.com/mastercard-redefines-choice-at-checkout-with-acquisition-of-vyze/
4 https://www.pymnts.com/mastercard/2019/vyze-pos-financing-consumer-lending-retail-shopping/
5 https://www.transunion.com/blog/iir-consumer-credit-origination-q4-2018