Shared from the Thu 18 Jul, 2019 - Financial Review Digital Edition

Fintechs boost consumer purchasing power

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The expansion in instalment payments has also been credited with supporting retail spending over the past year or two.

The payments revolution is fuelling a boom in consumer credit, facilitated by the proliferation of fintech companies offering instalment plans.

This ‘‘buy now, pay later’’ approach has given new life to the old idea of lay-by, with the modern twist that shoppers can take their purchases with them straight away, rather than waiting until they have made their final payment.

The expansion in instalment payments has also been credited with supporting retail spending growth over the past couple of years.

Figures from the Australian Bureau of Statistics show Australian retail spending in April 2019 was $27.3 trillion, up 2.9 per cent in trend terms compared with April 2018.

Data on the contribution of instalment plan providers is harder to come by, but UBS analysts have estimated that in the six months to December 2018, the buy-now, pay-later providers listed on the ASX at that time accounted for about 16 per cent of the growth in discretionary retail spending.

The newest player in this space is payments software company Splitit.

Gil Levy, Splitit’s vice president, global marketing, says the company takes a different approach to the relationship between shopper, merchant and credit provider.

Most instalment payment providers work with a bank that offers consumer credit, he says.

For purchases up to a certain amount, usually about $400, such companies will approve credit based on publicly available information about them.

Once they go above that amount, the shopper will be required to fill in a more extensive loan application and undergo standard credit checks, and their performance in servicing the loan will be factored into their credit rating.

Levy says Splitit’s alternative solution allows shoppers to buy comparatively large items without needing to take on new loans that impact their credit.

Splitit works with VISA, Mastercard and UnionPay to help credit card holders make better use of the unused credit lying dormant on their cards. Cardholders take advantage of that credit without paying additional interest, late fees or other fees.

For its part, Splitit does not assume any credit risk because it is facilitating payments, not loans.

The risk remains with the credit card provider, while Splitit charges the merchant a percentage fee of about 1 per cent, plus a fee of a $1.50 on each instalment.

Levy says most people in developed economies have two or three credit cards, but are using only about half of their available credit at any one time.

‘‘Why go and take a loan when you are only using 50 per cent of your credit?’’ he says.

Splitit allows shoppers to draw the remaining credit available on a particular card at the time of the purchase. The merchant splits the total charge into monthly payments ranging from two to 36 instalments, so the shopper does not have to pay the amount in full at the end of the first month. In turn, the shopper gives the merchant an authorisation for the entire amount, so the merchant is guaranteed full payment over time. However, the merchant charges only the agreed portion of the purchase amount each month, reducing the authorisation accordingly. Splitit targets higher-value purchases than most of its rivals, with a typical transaction coming in at around $1000. Levy gives the example of a $1200 mattress, which might be paid off in four charges to the buyer’s credit card of 25 per cent each. When the first 25 per cent is charged, the authorisation is reduced to 75 per cent of the purchase amount. With the next 25 per cent, it falls to 50 per cent, and so on. In the fourth month, the last 25 per cent is charged and the authorisation hits zero.

Levy says the process is comparable to the moment when you check in to a hotel and give the hotel an authorisation for a certain amount on your card.

This gives the hotel security of payment, but the only charges that appear on your credit card statement are for the goods and services you actually buy.

‘‘When you get your statement, you only pay for what you are charged, not what you are authorised,’’ he says.

Splitit launched its Splitit Payments Platform in 2016 and has since expanded into the US, Europe and Asia as well as Australia.

Splitit listed on the ASX at the end of January, raising $10 million in its initial public offering. In May it raised a further $30 million on the strength of its surging share price.

It signed its first major tie-up in the Australian market with e-commerce retailer Kogan at the beginning of July.

From a marketing and e-commerce point of view, Levy predicts instalment payment plans will continue to buoy spending growth and help make the relationships between merchants and shoppers more personal.

‘‘It’s becoming more of a two-way street,’’ he says.

‘‘Instalments help shoppers become more engaged with merchants, and for merchants it’s a way to increase conversions.’’

‘‘Why go and take a loan when you are only using 50 per cent of your credit?”

Gil Levy, Splitit

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