Article by PartPay CEO John O’Sullivan
Traditional point of sale finance options are misaligned with customers’ best interests.
This is because a large proportion of finance products offered are on a “no interest” basis - but this often doesn’t mean “no fees” and more importantly almost never means “no interest, ever”.
What “no interest” usually means is that there is actually very high interest once the interest-free period is over.
And this is the problem - “no interest (for a period)” financiers, and that includes banks that provide credit cards, want their customers to make inefficient decisions.
They don’t want you to repay within the interest-free period – quite the opposite.
And because the higher interest rate compounds, these products can often be the start of a debt trap.
Perpetual debt, hidden costs and exorbitant interest rates are all charged by our largely foreign-owned banks and retail finance companies.
New generations are wising up to more efficient ways to make their money stretch further.
Millennials and a large proportion of those under 40 are technologically native and savvy, and e-commerce is an increasingly popular way for them to shop - replacing the regular in-store retail experience.
This demographic is shunning traditional credit and they expect low (or no) cost, a frictionless experience and customer-centric solutions.
One development from these trends is the emergence of instalment payment platforms, which give consumers the ability to split their payments across a six-week period while getting their item or service right away.
Due to lack of clarity, there are misconceptions on how these platforms operate and whether they’re actually better for consumers than other alternatives like credit cards and short-term personal loans.
Getting the whole picture upfront
One of the key differences between instalment payment solutions and other retail finance products on the market is the lack of extra charges involved.
From the initial deposit to the final payment, there are no hidden costs or interest charges on instalment payment platforms.
As soon as an item is selected and purchased, the consumer knows exactly how much is due at each payment – and this doesn’t change.
Millennials are turning away from credit cards in general globally, with just one in three US millennials (18 – 24 years) opting to use a credit card according to a recent survey by Bankrate.com.
Instead, they’re largely choosing to use debit cards and effectively avoid credit cards entirely.
These options give consumers more control over how they use their money, eliminating hidden late or interest payments.
Credit checks to protect consumers
When signing up to use most instalment payment platforms, consumers are subject to a credit check to ensure they have a good history of making and managing repayments.
The emergence of instalment payment platforms has put the power back into the hands of consumers and away from banks and other financial institutions who earn income from people missing payments or through interest fees.
That’s not to say there aren’t late fees for instalment payment platforms.
For PartPay, these fees are capped and will never exceed a certain amount – this is designed to avoid any unreasonable outcomes and the fee itself is based on the actual cost to manage and chase late payments.
Furthermore, for any customer who has an active late payment, most platforms will freeze the customer’s account.
This combined with a cap on late fees means that the use of an instalment offering won’t result in a debt trap.
The services are here to help people who are responsible with their money, not to trap people who are not.
Convenience is key
Overall, of instalment payment provider empower consumers to spread the costs of their items into smaller, manageable amounts.
It’s no secret the workforce is becoming increasingly disrupted and fragmented, and our changing purchasing habits will naturally reflect that.
But what about the future of these platforms?
We are already seeing these products moving from e-commerce to other market verticals and helping people manage the cost of services - things like dentist bills, mechanic fees or home repairs.
These expenses can arrive out of nowhere and can be difficult for people’s finances.
It’s these concerns that many people turn to credit products for relief from.
But being able to spread these costs without indebting yourself is convenient and extremely liberating.
On the e-commerce side, we saw an influx of consumer using the platform to mitigate back to school stationery and uniform costs for example.
Overseas, these platforms have proven to be useful for consumers of all age groups and affluence.
The flexibility and control afforded by spreading payments to fortnightly is the natural next step for a world shifting evermore towards digital and customer-centric solutions.
Above all, making considered, informed decisions is the best way for consumers to understand the pros and cons of any financial product.
New Zealand is only just at the tip of the iceberg in terms of instalment payment providers, but already the market is beginning to populate with options for consumers.
It’s important for consumers to be educated about the offerings available to them and not simply assume traditional credit is the only option.