The pandemic has been hard on almost all business owners and consumers across the world. With people losing their jobs and expenses rising, millions of consumers have been going through a financial crisis for the last 10-12 months.
Such wide economic gaps are compelling buyers to trim their shopping lists and finding better ways to save. Consumers are also seeking more flexible payment options, especially contactless payments, to prevent the spread of coronavirus.
As a result, the past few months have witnessed a drastic change in people’s purchasing trends and patterns, along with a massive shift in their interests and preferences. For example, according to research, about 4% of Americans preferred the ‘Buy Now, Pay Later’ option during the Black Friday season.
This is why installment payment providers gained significant traction during the past few months all over the US market. COVID-19 has been unexpectedly favorable for these companies and has opened doors for them to grow further.
As mentioned earlier, more shoppers are going for budget-friendly and more flexible purchases. Therefore, numerous merchants are pursuing several methods to accelerate their sales by offering more convenient payment options to their customers.
During lockdown restrictions imposed in various countries across the globe, consumers relied more on e–Commerce stores, which naturally gave a significant push to the growth of online sales for merchants. Another aspect that online shopping gave rise to is installment payments. These are the major causes of the rapid growth seen in M&A activities.
The new ‘Buy Now, Pay Later’ (BNPL) trend is an extremely convenient method for customers, so much so that a study shows that most of them are not willing to buy from merchants not providing this solution. The trend is not only popular in the online shopping platforms, but also in stores, especially during holiday seasons such as Black Friday.
What are Installment Payments?
Installment payments refer to the method by which a customer pays a bill in small parts over a fixed period of time. These kinds of payments are arranged and agreed upon between the buyer and the seller. Examples include ‘Buy Now, Pay Later’ models and point-of-sale financing, which provide buyers with the flexibility to pay their purchase bills over time as per their convenience.
Some merchants even offer installment payment solutions without charging any interest. This is convenient for customers and merchants as well, who get paid by installment providers, thus increasing their conversions and average order values (AOVs).
For this reason, installment payments are most suitable for merchants who are in the high-AOV categories, including furniture, electronics, travel, fashion, and apparel. This is why several market players are occupying the entire installment payments industry. Some popular names among them are PayPal, Afterpay, Credit, Klarna, Affirm, etc.
Benefits of Installment Payments
Some of the top advantages of installment payments for both buyers and sellers include:
For customers:
- They help customers keep track of their finances.
- Buyers can stay within their budget limits.
- They allow consumers to stretch the cost of the purchase through a longer time period.
- Customers can make low monthly payments easily.
For sellers:
- You can provide more shopping flexibility for your customers.
- You can regulate and stabilize your cash flows.
- You can bring in more sales and boost your profit margins.
How to Track Installment Payments?
One excellent way to record or track your installment payments is through invoicing software, which ensures that your customers are paying their monthly installments on time. Two best methods to record installment payments are via recurring invoices per installment or partial payments for a single invoice.
If you use recurring invoices, you can set that up for every installment amount. The process will be smoother if you have your customer sign a payment contract, explaining to them the payment plan.
If you prefer partial payments, you would first need to generate the invoice for the particular consumer, ensuring you state the installment periods and payment terms clearly on the invoice. Next, when the time comes for the client to pay the first installment amount, you will need to add a partial payment to the created invoice.
Some software will have the option to update the status, such as partially paid, and the remaining amount to be paid.
The Current Status and Future of Installment Payments
For quite some time now, installment payments have been extremely popular in various markets, such as Australia and Europe. However, the trend has gradually been increasing in the United States for the last 12-18 months. The overall 2019 spending in the installment payments markets has been $623 billion.
The adoption of installment payment options has been especially prominent among Millennial and Gen Z customers. According to 451 Research, more than 1 out of 3 buyers within the age group of 18-37 believe that the availability of a flexible and convenient installment option has been a major factor affecting their buying decisions positively.
This is why merchants are noticing a rising demand in this trend and more successful order completions. Gradually, more than 40% of merchants from various industries have started offering this option during checkout, which has also reduced cart abandonment rates.
However, another 43% of the online-centric merchants are considering making the change or are discovering the benefits associated with it. A study in 451 Research’s Q2 2020 Voice of the Enterprise (VotE) revealed that among the top initiatives taken by merchants since the COVID-19 outbreak include adding flexible payment methods to their e-Commerce portals.
Some well-known merchants providing options for flexible installment payments in the US include Sunglass Hut, Walmart, Abercrombie, Peloton, Warby Parker, etc.
The mutual benefit that installment payment plans have for both consumers and merchants means that buyers will be more willing to return to your business and continue to make recurring purchases in the future.
Frequently Asked Questions
What was the purpose of installment plans?
The purpose of installment plans is to provide consumers with a flexible payment option for purchasing goods or services. Installment plans allow customers to pay for their purchases over time, breaking the total cost into smaller, manageable installments. This makes expensive products or services more accessible to a wider range of consumers who may not have the means to make a full upfront payment. The goal is to increase affordability and enable individuals to enjoy or benefit from a product or service immediately while spreading out the financial burden.
What are the benefits of installment payments?
Installment payments offer several benefits to consumers. Firstly, they provide a more budget-friendly approach, allowing customers to spread out the cost of a purchase over a set period. This can help individuals manage their finances more effectively and avoid the need for significant upfront payments. Secondly, installment plans often come with low or no interest rates, making them an attractive alternative to credit cards or loans. Additionally, installment payments provide convenience and flexibility, giving consumers the option to choose a payment plan that aligns with their financial situation and cash flow.
How do installment payments work?
Installment payments typically involve breaking down the total cost of a purchase into equal or predefined amounts to be paid over a specified period. When purchasing with an installment plan, the consumer agrees to pay a down payment (if required) and signs an agreement outlining the installment terms. The remaining balance is divided into regular installments, usually paid monthly, until the full amount is cleared. Depending on the arrangement, installment payments may be managed by the merchant directly or through third-party financing companies.
What is the history of installment plans?
The concept of installment plans has a long history, dating back to the early 20th century. Installment buying gained prominence in the 1920s when it became popularized as a way to make consumer goods more affordable. This approach revolutionized the retail industry by allowing customers to purchase items like automobiles, appliances, and furniture through installment payments. The availability of credit and the rise of installment plans fueled consumer spending and contributed to economic growth. Over time, installment plans have evolved and adapted to changing consumer needs and technological advancements, becoming a common feature in various industries today.
