0% interest installment plan: is it really zero-interest?

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Cards are a handy tool for payments. In addition to using credit cards as a convenient way to pay for items, cardholders can also benefit from installment plans. The full amount of a purchase can be spread into 3, 6 or 10 smaller, more manageable monthly repayments. Some card brands even offer a 36-month installment plan, that’s 3 years! Imagine purchasing a mobile phone, by the time it’s paid off you’ll most likely be looking for a newer model for a replacement.

The installment payment plan has its perks in reducing expenses into small monthly payments. It allows buyers to manage a better financial flow, instead of making payments in full amount at once. That said, it has its cons, which is the interest rate from the credit card issuing banks. The rate is in percentage of the total amount, and often varies by the duration of the installment plan. This will be charged on top of the total amount of the products or services.

We see the rising trend of 0% interest installment plan or the so-called zero-interest. It allows the buyer to split the full payment amount into smaller monthly payments without added interest. However, is it really interest free?

Before jumping into conclusion, let’s take a closer look into the 2 different types of installment options.

1. The cardholder absorbs the interest

In this case, the merchant informs the cardholder of the interest rate before making the purchase. Interest rates vary across card brands and the duration of the installment plan.

Take for example, John buys a pair of sneakers which costs 10,000 THB. He decides to split the payment into smaller chunks across 10 months with 0.60% interest. This means that John will be paying 1,060 THB monthly (excluding VAT) for a period of 10 months.

Interest calculation breakdown: 0.60% x 10,000 = 60 THB per month.

2. The merchant absorbs the interest

The merchant bears the interest or commonly known among buyers as the 0% interest installment plan. In this case, the bank deducts the interest from the amount the merchant receives and will charge the monthly payment from the cardholder.

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Adidas Predator Accelerator TR - CBLACK/FTWWHT/RED

So, it is obvious that the card issuing banks still receive the interest fees, but it is just a matter of who bears the cost of it - the cardholder or the merchant. In this post we’ll be looking into a use case from one of our merchants, Ari Football Store. Ari currently absorbs the interest fee (0% interest installment for customers) to help drive their sales as buyers tend to make quicker decisions when knowing that there is no interest added on top of the product's cost.

Installment payments may be a split of cost for the buyer, but for the merchant the full amount is deposited into the account right away. The store’s financial flow will not be affected. Installment payments work great for businesses with high-valued products or services.

Case I: Cardholder absorbs the interest

A customer buys a pair of sneakers for 20,000 THB and decides to pay in 4 installments. The merchant will receive, from day one, the 20,000 THB (VAT and Omise transaction fee deducted). And each month, the bank will collect the monthly payment and interest from the cardholder.

Case II: Merchant absorbs the interest

A customer buys a pair of sneakers for 20,000 THB and decides to pay in 4 installments. The merchant will receive, from day one, the 20,000 THB amount (VAT, Omise transaction fee, and bank interest deducted). And each month, the bank will collect the monthly payment from the cardholder.

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A payment page with installment payment option embedded in the store's website

Can debit cards be used for installment payment?

Debit cards are common. Most people who have got a bank account would usually own a debit card too. It is a mixture between a credit card and bank transfer; physically similar to a credit card, but the capability is more like a bank transfer. The key differentiator between credit and debit cards are that, for debit card, funds are deducted from the bank account right away.

However, debit cards come with greater benefits compared to a bank transfer. In case of refund or order cancellation, the amount can be reversed back to the card. This would not be applicable for a bank transfer. If you happen to transfer the amount to a wrong account or want a refund, the amount is one way gone.

However, debit cards cannot be used for installments since it is a direct debit from the connected bank account. To collect a fixed amount from a customer’s debit card, we would recommend a functionality called “Recurring Payments”. This functionality works by tokenizing the card and using that token to create charges - daily, weekly, monthly, or as specified, again in the future. This is suitable for subscription model businesses which charges the customer the same amount - like gym memberships, monthly movie packages etc. More information here.

What is the difference between Recurring Payment and Installment Payment?

For Recurring Payment, merchants will receive funds when the cardholders makes payment- daily, weekly, monthly, or as specified. This is an interest free option. For example, 4-month gym plan for 20,000 THB. The gym (merchant) receives a fixed amount of 5,000 THB every month for 4-months. Whereas, in the case of installment payments, the merchant receives, from day one, the 20,000 THB (VAT, Omise transaction fee and interest fee deducted).

Currently, at Omise, merchants can offer customers up to 36-month installment plan (terms depend on the chosen bank). The minimum charge amount is 5,000 THB. We support 5 card brands. More information here.

Supported card brands
Installment plans

E-commerce businesses can start accepting installment payments with Omise in 2 simple steps:

  1. Register for a Live Account at https://dashboard.omise.co/signup. Click on “Live Dashboard” and fill out the application and upload the required documents. If you get stuck, feel free to reach out for help by using the form below.

  2. For assistance with integration, please refer to our documentation or reach out to our technical support at support@omise.co or check out forum.omise.co