As traditional lenders like Citi and American Express dust off old policy manuals for installment loans as a supplement to their credit card strategies, Square now enters the ring with their installment loan product that permits point of sale financing. Square Installments is much like the Affirm business model, but with a massive, in place merchant network. All that and Jack Dorsey.
As credit cards grow slowly, near a saturation point in the United States, Installment Sales Contracts (ISC) are gaining traction as an alternative because of their fixed payments, lack of interchange, and lending resurgence. Square has a unique position to address the market with its broad distribution network. Fast Company writes:
- Shoppers who buy big-ticket items from Square merchants will now have the option to pay via installment loans, the company said today. Square will offer the point-of-sale loans for amounts between $250 and $10,000, online and offline, through its Square Capital division.
- Installment loans have re-emerged as a popular payment option in recent years. For consumers, they offer clarity by locking in a fixed monthly cost, unlike credit cards.
- For merchants, they can increase sales by reducing cart abandonment and encouraging larger purchases. Affirm, a startup focused on installment loans, has raised $720 million in venture funding and partners with retailers including Expedia and Peloton.
The industry is buzzing. Market Watch defines the space.
- The company’s new Installments option will be available to people making purchases of $250 to $10,000 at Square SQ, -2.23% sellers that the company deems to be good fits for the credit program.
- Buyers can apply for the Square loans from their phones at home and then show a virtual card when they wish to pay, to avoid sharing their personal financial information with a merchant.
- Shoppers will have the option to pay for their purchase in fixed installments over three, six, or 12 months. Buyers who select auto-pay when applying for the loan and select the three-month choice will receive 0% APR.
Just what America needs. Another lending product. What consumers must watch here is that you don’t want to have multiple ISCs for financing a group of purchases. It will be easy to get funding for a refrigerator, microwave, dishwasher and trash compactor, but put them all together and amortize it over 12 months and you will pay much more than that Bank of America Visa that carries 0% interest and a 1/36th amortization.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group