How Credit Card Installment Lending Is Becoming a Critical Retention Play
By Liz Froment, Contributor at The Financial Brand
Simple Subscribe
Subscribe Now!
Buy Now, Pay Later (BNPL) is on the rise. 2025 data from the Federal Reserve found that 16% of adults used BNPL in the previous 12 months, up from 10% in 2021. For many buyers, the appeal of BNPL may go beyond just making big purchases more affordable; it’s a way to spread out payments and track cash flow without tying up credit.
But this relationship has moved more financing activity outside bank and credit union card programs to third-party fintechs. Now community banks and credit unions have an opportunity to turn on their own embedded pay-over-time options to win back and retain more of these customer relationships.
Need to Know:
- Consumers already expect pay-over-time. Fed data shows 16% of adults used BNPL in the last year.
- Embedded pay-over-time helps institutions retain financing activity and relationship insight. If members use third-party providers, that visibility is lost.
- Balance growth doesn’t mean a program is working. Installment balances can mean new spending, shifted debt, or members under financial strain.
- The product needs a full operating model. As with other credit programs, it needs data, servicing, and compliance in place before launching.
Why Institutions Are Adding Pay-Over-Time
Fintechs have set the expectations with pay-over-time, and consumers have followed. Fed data shows BNPL providers originated close to $160 billion in 2025. More than half of that was “pay-in-4” installment plans. That financing is happening with credit unions’ members but outside their balance sheets.
“Members have been using pay-over-time, just not with us,” Anand Solanki, CFO and Head of Product Management, Analytics, Strategy, and Facilities at Citadel Credit Union, told The Financial Brand. “Every time someone splits a purchase through Klarna or Afterpay, that relationship moves outside our walls. We don’t see it, we can’t help with it, and over time, we lose a little more of the primary financial relationship.”
Key insight: A credit union member may have every one of their financial accounts at a credit union. But when the member is captured by a third-party’s installment plan at checkout, the institution loses sight of how that member borrows. So, their next credit decision may be made without knowing the full extent of the member’s purchase and repayment behavior.
Adam Neiberg, a global banking solutions manager at SAS, a data and AI company, says that banks can already see customers’ payments going to pay-over-time providers. That data provides a visible measure of how much financing is leaving and how much they could retain. It may help build a business case for offering pay-over-time in-house.
“If a member finances a $4,000 purchase through a third-party BNPL provider instead of their credit union, the institution loses more than financing income. It loses transaction data, purchasing insight, engagement opportunities, and ultimately a measure of relationship primacy,” Richard Winston, global head of financial services at Slalom, a business and technology consulting firm, told The Financial Brand.
How Pay-Over-Time Changes Card Use
After a credit union turns on pay-over-time, the change in members’ buying behavior may be smaller than most expect or show up in places they hadn’t considered.
“It’s more nuanced than most people expect going in. We didn’t see members suddenly spending more. What changed was how they thought about timing,” says Solanki.
The use cases surprised Citadel Credit Union. Instead of big-ticket buys, members were mostly applying installment plans to everyday expenses, helping smooth cash flow to align with bills. Members also came back to use pay-over-time again, which, for Solanki, indicates they find it useful.
The Federal Reserve’s 2025 Survey of Household Economics and Decision Making shows 31% of consumers choose BNPL to spread out payments, followed by 29% saying it’s the only way they can afford a purchase. About 20% of consumers use pay-over-time for food (groceries or delivery).
Key insight: A credit union member using pay-over-time can make a necessary expense, like food, more manageable without moving the purchase to a third-party provider or needing to apply for more credit. Citadel Credit Union has a post-purchase model members can apply after a transaction, which allows users to see how a payment plan fits their budget before they commit to it.
“Adding pay-over-time doesn’t necessarily change how customers use their card on a daily basis. Rather, it keeps the bank under consideration when a customer wants to finance a specific purchase,” says Neiberg.
Pay-over-time balances come from two places, and Solanki says institutions see both. Some are new balances from spending that’s recaptured from a third-party provider. But some are also existing card debt that can be restructured into a new plan.
Winston says institutions implementing pay-over-time need to separate customers into three groups:
- The planning customer would have paid in full anyway. BNPL creates a balance where there wasn’t one, which builds volume but can cut margin.
- The incremental spending customer buys because having the payment option changed their decision. This is growth the bank can build on.
- The stressed customer may be running short on available credit. Their use could indicate they’re experiencing some financial strain.
Each of those groups creates different outcomes around retention, risk, and revenue. “Without separating these populations, a single attach rate or average plan yield hides the actual economics,” says Winston.
Key insight: Just focusing on balance growth alone won’t provide the full picture. Credit unions need to understand whether an installment plan is retaining spend or shifting borrowing behaviors, helping a customer manage an expense, or revealing a member needs more financial support.
What it Takes to Run a Pay-Over-Time Program
For many community banks and credit unions, the most difficult part of implementing a BNPL system is the operating model behind it.
“Most modern platforms can support the desired BNPL functionality. The real challenge is whether the institution has built the operating model required to manage BNPL at scale,” says Winston. “Producing the product is easy but operating it well is the challenge.”
Winston points out that institutions already have accounting, servicing, credit reporting, compliance, customer communication, disputes, hardship and modification, loss forecasting, and portfolio monitoring in place for other credit products, so installments shouldn’t be an exception.
“The data infrastructure is the first thing I’d look at,” says Solanki. “Our tool draws on real-time cash flow data from actual account activity, not just a credit score, to assess whether a member can reasonably repay. That kind of assessment only works if your core can surface account data cleanly and quickly. A lot of legacy systems can’t do that without real effort.”
Customer service and member experience also have to be dialed in to support the same goals. Members want to see their payment schedule, outstanding balance, and upcoming payments in one place. For the member who uses pay-over-time as a tool to help manage their cash flow, that visibility is valuable. If that information is hard to find or difficult to understand, it creates friction.
Compliance also has to be involved in creating this product from the start. “Get compliance in the room early, not at the end,” says Solanki. “Terms need to be plain, upfront, and accurate. Eligibility needs to reflect actual ability to repay, not just a checkbox. The way we think about it, this is a short-term financial management tool, and every piece of member-facing language should say that clearly.”
The reality is none of this is new to these institutions, but all of it should be built before launching a pay-over-time program rather than bolting it on after.
Turning Pay-Over-Time into Retention
Embedding pay-over-time gives community banks and credit unions a way to keep financing relationships that have been moving outside their card programs. A well-run program gives customers a clear and useful way to manage payments.
Bottom line: For the institution, the real test should focus on whether pay-over-time programs improve customer experiences and relationships while still meeting the same standards for responsible lending, servicing, and compliance that apply across the rest of the portfolio.
