Mastercard enters ‘buy now, pay later’ battle with new installment loan program

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The MasterCard logo on a smartphone arranged in Saint Thomas, Virgin Islands.
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Mastercard is jumping into the competitive installment loan space by allowing banks and start-ups to ramp up their own “buy now, pay later” offers.

The credit card giant announced a new program called “Mastercard Installments” for U.S., Australian and U.K. markets on Tuesday, which will go live in the first quarter of next year. The increasingly popular lending style lets buyers split up purchases through monthly, often interest-free payments.

Mastercard doesn’t lend directly to customers. Its network acts as a middle man in the payment process for credit and debit cards. In this case, it will enable banks and fintechs to “plug in” to the Mastercard program and offer loans directly.

Barclays U.S. consumer bank, SoFi, Synchrony and Marqeta are among those that said they plan to use Mastercard for rolling out installment loans.

“Consumers are demonstrating a high level of interest in this buy now, pay later capability,” Craig Vosburg, chief product officer at Mastercard, said in a phone interview. “It uses the power of the Mastercard network and franchise to bring this to market at scale.”

So-called BNPL loans increase sales by 45% on average, and reduce “cart abandonment” by 35%, according to Mastercard. Vosburg, who is also Mastercard’s president of North America, said merchants see these types of loans as a way to drive more sales. Customers, meanwhile, tend to turn to these loans as cheaper and more convenient alternatives to traditional revolving credit.

The space has become a battleground for banks and fintechs alike.

Jack Dorsey‘s Square announced a $29 billion deal in August to buy Australian company AfterPay as a foray into the space. Affirm, one of the early and better-known companies in the space, recently partnered with Amazon for a buy now, pay later option on the e-commerce site.

PayPal, Klarna, Mastercard and Fiserv, American ExpressCiti and J.P. Morgan Chase are all offering similar lending products. Apple plans to launch installment lending in a partnership with Goldman Sachs, Bloomberg reported. Mastercard rival Visa is developing a similar product.

Affirm CEO Max Levchin is among those that have argued installment lending could be a threat to traditional card players, like Mastercard and Visa, by chipping away at revolving credit. But Vosburg said it’s “additive.” Many of the payments made to fund the loans tend to be a Mastercard credit transaction, in which the company collects a small fee.

“We see a high prevalence, in our program and others, as people choosing Mastercard debit as the means of repayment,” Vosburg said. “It’s consistent with our mission of providing choice to both consumers in terms of how they want to pay, and to merchants in terms of how they want to be paid.”

Plans differ in terms of interest payments, although many are interest free to start. Mastercard said it’s up to the lender to decide on the rate, and whether to allow use of credit cards to fund installment loans.

Others have warned about the risk of additional credit and something called “debt stacking” — or using traditional forms of credit to fund these installment loans. Some pay-later offerings also aren’t reported to credit bureaus. Companies offering these loans say they’re able to use data to assess credit worthiness better than a traditional FICO score.

“Lenders don’t want to extend loans that can’t be repaid, and we don’t want to see lenders doing that — so we’re actively working to improve the visibility of information about a consumers capacity to repay a loan,” Vosburg said.

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