Split Payments vs POS Lending: Which BNPL Solution is Best?

With all these Buy Now Pay Later terms floating around, it can get somewhat confusing.

We’re here to clear it all up.

First-off, here’s the twist: Split Pay is not a loan.

Even though it looks like a loan and smells like a loan, Split Payments is actually a payments product.

Let’s dive right into the details.

How does Split Payments work?

Even though Split Payment solutions for banks is a new concept, Split Payments in itself is not.

Giving customers the ability to better manage their cash flow by splitting a purchase price into bite-sized amounts has been around since fintech companies introduced the concept to the world.

Split payments refers to the action of splitting up a credit or possibly debit card payment into equal, interest-free installments. The merchant gets paid the full amount upfront at the moment of purchase. From the consumer’s perspective, only one-third or one-quarter of the payment is charged to the credit card at the point of purchase, depending on whether they have a pay-in-3 or pay-in-4 split payment option. The remainder of the payments are made at different intervals, such as monthly or bi-weekly, depending on the terms of the solution.

In addition to pay in 4 installments or pay in 3 installments, there are a number of other differences between Split Pay solutions. There are split payments at the point of purchase, and there are split payments that happen post-purchase, whereby the credit card payment is divided into installments after the fact, such as offered by Mastercard Installments. 

This is how Split Pay works:

What is POS Lending or Point-of-Sale Financing?

Point-of-sale financing is the traditional longer-term consumer financing provided by banks or financial institutions, just offered at a point of sale instead of in a bank branch, for example. 

These retail loan programs include:

• Installment loans
• Lines of credit

They typically come at a 0% APR (annual percentage rate) for shorter-term loans or a low interest rate for the longer-term loans for bigger-ticket items.

Which are the main differences between Split Payments and POS Lending?

The number one difference between Split Payments and Point-of-Sale Financing is the fact that Split Pay is not a loan. 

From a bank’s perspective, this means:

• No underwriting necessary because the payments are drawn from a credit line that was already extended to the user by another issuer.
• Similarly, KYC (Know Your Customer) was already done by the issuer of the credit card that is used to make the repayment, so instead the focus is on CNP fraud checks.
• Expand reach to any credit card holder.
• The first installment is paid at checkout, as much as a quarter of the purchase price. This gives the banks security, knowing that they have a form of payment that they know works.

For merchants, there’s no impact in terms of risk. Either way, the merchant gets the full purchase price upfront. 

Another big differentiator is the fact that POS lending is an alternative to a credit card, which is a good fit for consumers that don’t own a credit card or that have one but want to pay lower interest rates.

Split Payments, on the other hand, require a credit card as the credit payment itself is split into installments. 

The difference between these two BNPL options is more of a use case effect. 

Split Payments are better suited to smaller-ticket purchases, while point-of-sale financing is typically appropriate for larger purchases.

Do consumers pay interest with Split Payments?

Typically, consumers don’t pay interest to use a Split Payment solution.

So how does the lender make money?

In lieu of interest from the consumer, the merchant pays a fee per transaction to the lender.

Do consumers pay interest with Point-of-Sale Financing?

With POS financing, whether or not the consumer pays interest depends on the terms of the financing.

For example, if the consumer loan is long term, it could come with a low interest rate or APR.

Short-term point-of-sale financing is usually associated with a 0% APR.

In cases of low or no consumer interest charged, the cost is usually offset by a transaction fee charged by the lender or the merchant ‘sponsors’ the interest rate on the consumer’s behalf.

Buy Now Pay Later programs from banks usually have lower transaction fees than those of fintech companies, as banks can leverage their large balance sheets. 

Split Payments vs POS Lending: An Overview

What are the benefits of Split Payments to lenders?

These are some of the main benefits of offering Split Payments to merchants:

1. No underwriting required

Because split payments are a payment product, and not a loan, there is no underwriting required. 

2. Ability to reach new customer base

Because any consumer with a credit card can apply for split payments, a lender can reach consumers that wouldn’t typically apply for financing.

Which should I offer: Split Payments or POS Lending?

The answer is: it depends.

If you offer a range of products, you could even offer the full spectrum of BNPL solutions.

Pöint-of-sale financing is a good match for the larger items, and split payments for the smaller-ticket purchases. 

Who decides which BNPL option? Is it up to the consumer, the merchant or the lender?

All the customer knows is that they want to fulfil their needs and desires, and need financing to help them manage their cash flow.

It’s up to the merchant and the lender to decide upfront which BNPL options are best suited to which use case and to set the parameters in the BNPL platform. You could also give the consumer optionality, the choice between split payments or a point-of-sale loan.

Disclaimer: The information in this article is for informational purposes only, and should not be construed or relied upon as legal advice on any subject matter. The author is not responsible for any consequences whatsoever arising from the use of such information.