Monday , September 23, 2019

COMMENTARY: Visa Next’s Installment APIs Solve Only Part of the Problem

Following Klarna’s recent raise of $460 million looking to expand its payments presence in the United States, and Mastercard Inc.’s recent acquisition of Vyze, the consumer-finance space is heating up with the big players of the finance world entering the arena. It is a further indication of the importance of easily available consumer finance.

Visa Inc. has become the latest payment network to offer its own set of tools complementing point-of-sale programs for consumer finance, and Visa is to be congratulated for addressing the needs of retailers and shoppers in this new financial climate.

Visa’s latest installment solution has launched under the aegis of Visa Next, a new platform for digital payment solutions that run on a series of application programming interfaces (APIs). Visa’s offering will allow purchases to be divided into installment payments using the customer’s existing credit line.

Martin: “Visa Next misses a crucial aspect that would have brought something new to the table.”

Although Visa has not confirmed all the details, it appears that customers will not need to apply for financing using any entity other than their usual bank and will not need to undergo any additional credit checks as long as they are using a Visa-participating card.

It is no surprise that Visa is looking for a slice of the POS-financing pie. The POS market has been growing at 15% a year and reached $1.2 trillion in transaction volume globally in 2017. Afterpay, a fintech company listed on the Australian Securities Exchange, has already seen its share price drop in response to Visa’s announcement. However, it is important to acknowledge that, while many companies are offering retailers a way to help their customers split payments, there are significant differences in how each solution achieves the end result.

Visa’s method of dividing payments within the consumer’s existing credit line is not unique and is already offeredin several countries around the world. It will be new to the United States, where lending company Affirm has sprung up to fill the gap by offering customers short-term loans that can be paid back in monthly installments. Another firm, Splitit, is already in the market with a solution that lets you use your existing credit line. Now, Visa’s solution will enable card issuers to directly compete with Splitit.

The biggest advantage of Visa Next’s installment APIs is that they enable issuers to offer cardholders the option of accessing their credit lines to repay with fixed installments. These might include consumers who don’t necessarily want a relationship with a third-party lender or an alternative financial institution. For them, being able to use the same lender and card is crucial, as they have an existing relationship with their credit provider and prefer the consistent experience.

But Visa misses a crucial aspect that would have brought something new to the table. It still requires integration with every merchant that joins the program, and it can only provide loans from one specific lending institution. Retailers need to integrate the system with their e-commerce platforms and POS terminals to benefit from this new offering. Other platforms today can offer flexible back ends that allow merchants to select from several lenders, and on the front end allow for limitless merchants to onboard with friction-free integration. 

Additionally, Visa’s approach to consumer finance, which involves a single line of credit, has its limitations. The foremost issue is that the customer is using an existing line of credit that then won’t be available for many months. Also, there is limited flexibility for the merchant in choosing which lender to work with. After all, consumers are moving away from traditional credit cards, which have the highest APRs and no prearranged repayment plans.

The alternative approach to consumer finance is to work with third-party lenders that offer an extra line of credit or an installment loan. Mastercard Inc., for example, recently acquired POS lender Vyze, but also facilitates other fintech solutions. For example, Mastercard enables other companies to issue the financed funds on a digital card that is then used at the point of sale as a regular transaction online or in-store.

Fintech solutions are able to offer a tailor-made relationship between the bank and the retailer, with unique loan programs and interest rates based on the specific retail vertical and use case. On the other hand, Visa’s bank partners, which issue cards and hold the loans on their balance sheet, still dictate the installment payments, interest rates, and late fees.

Visa is not divulging its exact business model for the installment program. For now, it can only be assumed that the APR will remain close to the typical credit card rate. It will be interesting to see if these solutions from Visa Next can offer shoppers anything like the 0% rates offered by some of the current financing solutions. 

Visa clearly wants in on POS financing, but it is intriguing that it took this route, despite the limitations it implies for merchants and customers. While Visa’s announcement has definitely sent ripples through the consumer-finance community, it will be interesting to see how Visa Next’s installment APIs develop in the POS loan space—specifically, whether Visa is able to claim its own share of the market alongside other, more easily integrated solutions. 

Yaacov Martin is the co-founder and chief executive at Jifiti, based in New York City and Columbus, Ohio. 

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