Published: June 30, 2020
Introduction
As we pointed out in our 2020 Payments Outlook, installment payment providers were well-poised for continued growth entering the year. Not only does this hold true today, but we believe that COVID-19 has further accelerated momentum. As a result of the economic consequences of the pandemic, we expect to see more shoppers seek budget-friendly payment options, and more merchants pursue different avenues to increase sales. Further, with the volume of consumers and merchants engaged in e-commerce increasing during the lockdown, significant expansion of the addressable market for installment payments has occurred. These forces all bode well for further growth, as well as M&A activity. In this report, we discuss the state of the installment payments sector in the US and offer our take on the potential acquirers that could consolidate the market, and the targets they are likely to pursue.
The 451 Take
Installment payment providers have gained meaningful traction in the US market over the past 12-18 months. Coronavirus has created uniquely favorable tailwinds for these players that should accelerate progress further. With the market opportunity broadening, we believe increased dealmaking will soon develop. The potential shoppers in this space are many, and include card networks, financial institutions, private-label card issuers, payment processors, large Chinese fintechs, and installment payment suppliers in pursuit of global expansion.
Context
Installment payment options (including point-of-sale financing and 'buy now, pay later' options) give consumers the flexibility to pay for a purchase in multiple installments over time – in some cases, without accruing interest – instead of paying in full at checkout. For merchants (who get paid upfront by the installment provider) this offers the prospect of increased conversions and the potential for higher average order values (AOVs). Installment payments are particularly well-suited for merchants in high-AOV categories like electronics, travel and furniture, but have also shown results in more traditional categories such as fashion and apparel.
Installment payment options have been highly popular in markets like the Nordics and Australia for some time. Our research suggests that momentum is now beginning to build in the US – a massive e-commerce market, with $623bn in overall 2019 spending, according to our Global Unified Commerce Forecast. Adoption has been particularly strong among Gen Z and Millennial consumers. We find that more than one in three consumers aged 18-37 say the availability of an installment payment option has influenced their decision to complete a purchase.
451 Research's Voice of the Enterprise (VotE): Customer Experience & Commerce, Merchant Study indicates that merchants are taking note of increasing demand (see Figure 1). Over 40% of online-centric merchants (more than half of sales occurring online) are now offering this payment option at checkout, and another 43% are either in discovery, planning or considering adoption – meaning more market share is still up for grabs. The study also revealed that adding 'flexible payment options' ranked as the top initiative among all merchant respondents for deepening customer loyalty. Notable examples of merchants offering installment payment options in the US today include Walmart, Sunglass Hut, Anthropologie, Abercrombie, Urban Outfitters, Peloton, Casper and Warby Parker.
Past Deals
The largest acquisition in this sector occurred more than a decade ago when eBay (PayPal) handed over $820m for Bill Me Later. The target has since been re-branded as PayPal Credit and is an important part of PayPal's current payments arsenal. Most deals, however, have occurred in recent years and were led by a mixed bag of buyers. The purchases that have unfolded over the past 18 months point to three trends that we anticipate will persist: US expansion (Zip's reach for QuadPay), fire sales (Alliance Data Systems' pickup of Blispay) and traditional payment companies looking to align themselves with the market opportunity (Mastercard's acquisition of Vyze).
Potential Acquirers
With market appetite for installment payments increasing in the US, we can envision a variety of potential acquirers. One likely cohort are credit card firms that view installment payment offerings as a threat to their core business. A large card issuer like Chase or American Express (which both already offer their own post-purchase installment plans) could benefit from buying an installment payments provider to move up the sales funnel and court non-cardholders. Similarly, we could see Visa follow up Mastercard's 2019 purchase of Vyze by nabbing a vendor with a multi-lender platform. A private-label credit card issuer, such as Capital One or Synchrony Financial, could also benefit from adding installment payment capabilities to serve up a white-label offering to its retail customers, or diversify its business.
Another group of potential suitors are Australia-based installment payment providers that have not yet broken into the US market. After watching the growing US momentum of Melbourne-based Afterpay from the sidelines, they may be keen to acquire a US-based provider, as Zip did earlier this year when it bought QuadPay. Potential Australia-based shoppers include OpenPay and Payright. Afterpay itself could also be a buyer should it look to consolidate the increasingly fragmented US market, as could Stockholm-based Klarna. Both are among two of the more prominent international providers that have been operating in the US for several years.
Other potential suitors include payment processors that may be looking to build out a consumer proposition. An installment payments capability would significantly augment the functionality of Square's fast-growing Cash App and give it a deeper position in e-commerce. It would also enhance the reach of its Square Installments offering for merchants. Stripe or Adyen could also be acquirers should they look to make a dramatic pivot by following PayPal's footsteps to begin directly serving consumers. These types of buyers could also integrate installment capabilities in less dramatic fashion by avoiding the buildout of a consumer brand and opting for a white-label approach.
Possible Targets
New York-based Splitit would make an interesting target for Visa or Mastercard given that its model relies on a partnership with both card networks to operate. The ASX-listed company recently announced a strategic, multiyear tie-up with Mastercard to broaden global distribution of its offering.
London-based Dividio raised a $15m series A from investors including Mastercard and American Express Ventures in 2018. The vendor has a multi-lender, white-label installment payment platform that would align with a card network, private-label card issuer or payment processor that isn't aiming to build out a consumer-facing brand. ChargeAfter, which took an investment from private-label card issuer Synchrony Financial, offers a similar proposition. Bread, which raised $60m in 2018, also has a white-label installment offering that could make it an attractive target for an acquirer wishing to remain behind the scenes.
Klarna most recently had a post-money valuation of $5.5bn when it announced a $460m equity funding round in August 2019. The startup has one of the strongest brands and market shares in the sector. While not cheap, reaching for Klarna would garner a deep-pocketed acquirer an instant leadership position. Ant Financial, an existing investor, could be one plausible suitor should it seek to pursue further global expansion. Acquiring Afterpay, which China-based Tencent recently took a 5% stake in, would also offer a prominent, albeit pricey, onramp into the sector. So too would Affirm – a startup run by PayPal cofounder Max Levchin that has raked in over $800m in equity funding.
Small and midsized players could make for attractive consolidation plays for some of the more established installment payment providers like Klarna, Affirm, PayPal or AfterPay. Denmark-based Viabill, which started in Norway in 2018 and launched in the US last year, could be one such target. Minnesota-based Sezzle, which is ASX-listed, could be another target – especially for an international installment player looking to increase market share in the US.
An Associate Analyst in 451 Research’s Customer Experience & Commerce Channel, Cam O'Shaughnessy covers the digital commerce ecosystem, including e-commerce, mobile payments and omni-channel commerce. Additionally, he contributes to the design and writing of the consumer insight-driven VoCUL (Voice of the Connected User Landscape) Digital Wallets survey product.
Jordan McKee is a Research Director for Customer Experience & Commerce, and also leads 451 Research’s coverage of the payments ecosystem. He focuses on digital transformation across the commerce value chain, with an emphasis on the major trends impacting payment networks, issuing and acquiring banks, payment processors and point-of-sale providers.
Csilla is a senior analyst for 451 Research’s Data, AI & Analytics channel. She currently focuses on decoding the blockchain market to help replace confusion and complexity with an examination of the technology, the competitive landscape and available solutions that are driving the market, as well as real-world use cases and deployments.