Banks are trying to catch up to one of the hottest trends in consumer finance and head off competition from fintech start-ups, allowing clients to buy what they want when they want it and pay later on instalment — usually interest free.
JPMorgan announced a new partnership with Affirm in February to offer the instalment loans to its 900,000 business clients, after introducing the so-called buy now, pay later options for its consumer card customers a few years ago.
Citigroup, too, offers deferred payment loans to both its customers and through retailers. Citi began offering deferred payment loans through Apple Pay in January, the first big bank to partner with the iPhone maker to do so. The lender also signed up 195 US merchants to offer its deferred payment option Citi Pay, which launched a little more than a year ago, directly to their customers.
The big banks are looking to expand into the growing area as regulations that limited deferred payments lending, and the fees that providers can charge, are being rolled back.
It also comes at a time when the retail banking business of the large banks is coming under pressure from continued high interest rates and growing competition from fintechs. In some cases, they are seeking to offer the service as a loss-leader to entice consumers into fee-generating chequing and savings accounts.
“This is one of the big reasons banks have lost some market share to fintechs, so this is partly a defensive move,” said Aaron McPherson, founder of AFM Consulting. “Other banks will follow.”
Profits for Citi’s US personal banking segment, for instance, which includes credit cards and its domestic retail banking network, fell 24 per cent in 2024, largely driven by an increase in credit card delinquencies. The division had a return on tangible common equity last year of 5.5 per cent, about half of the 2026 goal that Citi’s chief executive Jane Fraser has set for the entire group by the end of next year.
One of the reasons for the drop has been the growth of deferred payments, which is taking away business from the banks’ highly profitable credit card divisions. The instalment loans are generally spread over four payments, and charge consumers little or no interest.
Profits generally come from retailers, which are willing to pay a fee in return for the boost they get from the sales, and for taking on the risk that some of those loans will not get paid back.
But those fees tend to be much smaller than what banks get paid by consumers who use credit cards. Affirm, for instance, a standalone deferred payments fintech, earned $167mn in fees in its last fiscal year on $26.6bn in transactions it funded, or less than 1 per cent on average per loan.
Deferred payments are not always interest free. Instalment loans of longer than four months often carry interest charges built into what consumers have to pay. Banks and lenders can also impose late fees and other potential charges.
Research firm Emarketer estimated deferred payment loans funded $94bn in purchases last year, which is still only a fraction of the more than $7tn in overall annual US retail sales, but could grow another 50 per cent by the end of 2028, attracting more than 100mn users in the country.
Deferred payments lender Klarna is expected to complete a highly anticipated initial public offering later this year, which could value the Sweden-based fintech at more than $15bn. Shares of Affirm have nearly doubled in the past year to $60, giving it a $19bn market value.
Affirm executives have said their mission is to eliminate traditional credit cards and other forms of revolving credit, which carry high interest rates, and critics say can trap borrowers with debt they are never able to repay.
Not all banks have followed. Bank of America and Wells Fargo have mostly avoided the deferred payments space.
Rhode Island-based Citizens, which ranks as the US’s 15th largest lender, was one of the first of the big banks to embrace deferred payments lending. Recently, though, executives have been pulling back from consumer instalment lending, saying it has not had much success converting deferred payments into savings or chequing account users.
Among the big banks, though, Citi is looking to compete most directly with the fintechs. Along with offering pay-over-time options for its customers, the company is originating new instalment loans for clients who do not have an account with the bank, or, in some cases, no bank account at all.
Citi plans to run full credit checks before making the instalment loans, unlike some fintech competitors, as well as reporting the payment histories to credit bureaus. That is something the watchdog, the Consumer Financial Protection Bureau, had previously pushed for but many in the deferred payments space have been reluctant to do.
“Part of the appeal of deferred payments lenders is that they don’t necessarily check your credit,” McPherson said. “Being more conservative may not get them as much business, but probably a smart thing to do.”
