How a bank deals with millennials’ installment payment habits

The fintech rush into point of sale financing is partly a play on younger consumers’ migration away from traditional credit cards. This, in turn, has prompted a counterplay from Citizens Bank.

Citizens’ installment loans for iPhone replacements drew more than $1 billion in loans in the first three years of its program, and the bank is trying to replicate that success with other merchants. The Providence, R.I., bank does not offer a traditional merchant co-branded card, but instead is trying to forge agreements with merchants to offer installment payments as a companion product to Citizens’ more traditional credit card.

“There are a lot of things going on in the traditional credit card market that make it ripe for disruption,” said Andrew Rostami, executive vice president and head of unsecured lending and cards at Citizens.

The scope of the disruption is significant. In 2010, fintechs held only about 1% of unsecured installment debt in the U.S., according to Visa analysis of anonymized personal loan data from TransUnion. But that number rocketed to 36% by 2017, and is estimated to have reached nearly 40% today, according to Wayne Best, Visa’s chief economist, who spoke at SourceMedia’s Card Forum in May.

The Citizens point of sale installment program works similar to a fintech merchant installment feature, with payments over a set number of installments at 0% interest. The merchant pays the fees while the consumer (in theory) avoids accumulating debt by only paying the minimum on a monthly credit card bill.

Citizens customers for the installment product include Apple and Vivint, a company that sells in-home technology such as smart doorbells, voice assistants and other internet of things devices. Vivint's product, Vivint Flex Pay, offers 0% financing options for consumers. Apple and Vivint did not return requests for comment. Another retailer, home security firm ADT, is currently testing Citizens install payment program. The bank did not name any other merchants that have signed on for the installment product.

Citizens is trying to lure merchants as the overall market for point of sale installment payments expands. The option was initially more popular in Europe, though it's gaining steam in the U.S. as firms such as Klarna and Splitit plot expansions in part to compete with bank issuers. Splitit is taking a particularly aggressive stance, betting installment payments will be standard for all merchants within the next five years. Another competitor, Affirm, recently raised $300 million to add staff to fuel its growth.

The fintechs are drawing a response from incumbents. Visa, for example, in June added an API for issuers that want to quickly add installment payments to their financial services mix.

These companies are pursuing one-off purchases of over $1,000. Consumers want to pay for purchases of this size over time without applying for a co-branded card, Rostami says.

Citizens conducted a survey that found 76% of U.S. consumers are more likely to make a retail purchase if a payment plan backed by a "simple and seamless" point of sale experience is offered; and 62% of consumers would prefer fixed monthly plans.

“The traditional credit card is here to stay, but the area that’s being impacted by the install trend is the larger purchase at a retailer,” Rostami said.

Relative to older generations, millennials and Generation Z consumers are reluctant to finance purchases with credit cards, and many haven’t established a credit score that qualifies them for credit cards carrying significant benefits anyway, said Leslie Parrish, a senior analyst at Aite.

“They appreciate the simplicity of a closed-end loan and the built-in discipline of regular payments that result in the purchase being paid off on an established date, rather than the temptation to make only minimum payments,” Parrish said.

The unanswered question, in the absence of an installment loan option, is would these consumers grudgingly use a card or would they forgo the purchase altogether? “If installment loans are taking a bigger slice of the existing pie instead of making the overall pie bigger, then credit cards may be in trouble," Parrish said.