Pay-in-4 Shopping Apps
The simplest and most accessible form of BNPL, products in this category enable consumers to split smaller dollar transactions (typically less than $250) into four payments, with the first payment made at purchase and the remaining three payments due in two-week intervals. These loans are subsidized by merchants —commonly in apparel and footwear, fitness, accessories and beauty — in order to improve sales conversion rates and increase average order value and are offered at 0% interest to consumers, with no credit check required.
While pay-in-4 providers like Klarna and Afterpay started by integrating directly into their merchant partners’ checkout pages, they have since evolved into full-fledged shopping apps designed to convert first-time users (acquired through the merchants) into repeat customers that begin their subsequent purchase journeys from the pay-in-4 providers’ apps. The transition to this “shopping app” model is still in the early innings, but Afterpay reported that 17% of its customers initiated transactions from within its app in February of 2021.
An emerging alternative to the Klarna/Afterpay pay-in-4 model is card-linked installments. This capability, offered by providers like Splitit, allows a consumer to break a planned payment out into installments using their existing credit card. This model, which is dependent on merchant partnerships, is potentially advantageous to consumers that already have and prefer to use credit cards, which may be why traditional players in the ecosystem (large issuers, card networks, etc.) are exploring similar solutions.
Embedded POS Loans
For more expensive purchases (between $250 and $3,000) in categories such as electronics, furniture, home fitness equipment and travel, providers like Affirm and Uplift offer consumers installment loans, integrated through merchants’ checkout pages. These loans have nine- to 12-month terms and may or may not charge interest, depending on the customer’s credit worthiness and the merchant’s interest in subsidizing the transactions.
Consumers that use these loans tend to have prime credit scores and multiple options for financing larger purchases (including credit cards). They use embedded POS loans because of the convenience, the flexible payment terms or, if it’s offered, 0% interest.
For specific verticals like healthcare and home improvement, where transactions can run anywhere from $3,000 to $50,000, new fintech companies are emerging to challenge banks’ legacy unsecured installment lending and home equity lending products. Companies like Walnut (healthcare) and Greensky (home improvement) partner directly with the companies that consumers use to get these services, which gives them a significant distribution advantage over banks.