Walmart reportedly is closing in on an agreement with loan services startup Affirm for a pilot program under which Affirm would offer the retailer’s customers installment loans for purchases, sources familiar with the matter told The Wall Street Journal.The pilot could start as early as this fall.
San Francisco-based Affirm targets customers who don’t have credit cards or don’t want to use them, and offers them loans with interest rates ranging from 10% to 30% per month, depending on its assessment of the borrower. However, it doesn’t charge late payment fees.
Walmart currently uses Synchrony Financial as the provider of its own store credit cards, which charge interest ranging from 17.9% to 23.9%, but does charge late fees on past-due payments.
Affirm has quickly become a popular partner in the retail sector. The company, founded by PayPal co-founder and serial entrepreneur Max Levchin, announced last month that it had forged financing partnerships with more than 1,000 retailers since it was founded in 2012. It also has processed well over a million installment loans for consumers.
Why are retailers so enamored with Affirm? Giving customers the option to take out an installment loan to finance a purchase gives customers more choices, making it more likely that they actually will make the purchase. Millenials and other younger demographioc consumers are often loathe to carry mountains of personal debt that way previous generations have.
However, it also has to do with the inflexible and sometimes excessive terms of store credit cards, which generally charge higher interest rates than the lowest portion of Affirm's rate range. Still interest revenue and late fees from store cred cards contribute a significant amount of money to retailers' bottom lines, making it difficult for them to commit to giving their customers more financing choices.
Overall though, retailers, banks and credit card companies are all starting to understand that at a time of massive change in how and where people shop, they need to make it easier for shoppers to close the deal. Mastercard may recognize this as well as Walmart does. The card network aligned with Verifone late last year to begin offering instant installment financing at the point of sale.
Does this mean store credit cards could go out of style? It's unlikely because they serve as an alternative to major credit cards and may help consumers compartmentalize their purchases without packing on too much debt from too many places on a single card. Still, retailers will have a major say in the future of store-branded credit cards. If they can attach enough advantages, bonuses, rewards and other special features to them to promote their use, they should stick around.