Installment Payments: How Millennials Are Shopping
Millennials don’t own or use credit cards nearly as much as past generations. According to a survey conducted by Bankrate last year, only 33 percent of adults between the ages of 18 and 29 have a credit card. Having seen the aftermath of the financial crisis, millennials are wary of the high-interest rates and open-ended nature of credit cards. To help retailers capture that lucrative market, financial technology—or Fintech—companies have begun offering a wider variety of online payment options that divide purchases into four equal, interest-free installments.
Fintech companies like Affirm, Afterpay, and QuadPay offer installment-payment plans to target millennials and other underbanked customers who want greater flexibility to make larger purchases and pay over time. So far, it appears to be working.
The new zero-interest, installment-payment products are designed to avoid most federal and state credit-related regulations, such as the federal Truth in Lending Act (TILA) and state retail installment sales acts (RISAs). The products are, however, still required to comply with fair lending (anti-discrimination) laws and consumer protection laws that prohibit unfair, deceptive, and abusive acts and practices (UDAAPs).
The reason these products can offer zero interest and must break-up purchases into four or fewer installments is because TILA and its implementing regulation, Regulation Z, cover credit extended to consumers for personal, family, or household purposes only if the credit carries a finance charge or a written agreement requiring more than four installment payments. Many state RISAs are modeled after TILA and limit coverage to agreements with consumers that charge interest and/or have more than four installment payments.
Compliance with these federal and state laws falls largely to the Fintech companies that offer the products. But retailers should proceed with caution. It is critical to analyze these regulatory issues before offering new payment products. Each product—and every state law—is different. Retailers can have collateral legal liability, suffer reputational damage, or experience operational disruption if they do business with Fintech companies that don’t comply with these complex and shifting laws.
These new payment products typically charge late fees and may result in debt collection or credit reporting, which are regulated by federal and state laws. In addition, some states have regulatory requirements in which retailers have certain legal obligations because retailers are typically the parties originating the installment contracts with consumers.
It is important that retailers be aware of the regulatory and reputational risks associated with these increasingly popular new payment products and address any issues before they become a problem. The Retail Group at Ballard Spahr has members who focus on consumer financial services. They often advise clients about federal and state laws to mitigate regulatory risks and identify compliance obligations.