Split payment is a method of payment which allows customers to pay for goods or services in several installments. It is a convenient way to purchase items that may have a higher price tag.
Split payment involves splitting the total purchase amount into two or more payments for the customer to pay. The first payment is usually a down payment, with the rest of the amount split into installments. Each installment is usually due on a fixed date, with the total amount being paid off in the end.
The benefits of split payment include:
- Convenient: Split payment allows customers to purchase items that they may not be able to afford with a single, large payment.
- Flexible: Customers can choose how much they want to pay upfront, and the payment schedule of the remaining installments.
- Secure: Customers can be sure that their payments are secure as the merchant will only be able to access the total amount after all installments have been paid.
Example of Split payment
Split payment can be illustrated with an example. Suppose a customer wants to purchase a television that costs $1,000. With split payment, they can opt to pay a down payment of $500 upfront, and pay the remaining $500 in two installments of $250 each. The first installment would be due on a fixed date, and the second installment would be due on a later date.
In this way, the customer can purchase the television with split payment and pay off the total amount over time.
When to use Split payment
Split payment is a great alternative to traditional payment systems for customers and merchants alike. It can be particularly useful when the item being purchased is expensive, or when the customer is unable to make a single large payment.
Some examples of when to use split payment include:
- Buying a car: Split payment can be used when buying a car, allowing customers to pay for the car in installments over a period of time.
- Paying for a large purchase: If a customer is unable to make a large purchase in one go, split payment can be used to pay for the item in installments.
- Paying for services: Split payment can be used to pay for services such as tuition fees, or gym memberships.
Types of Split payment
There are two types of split payment:
- Deferred Payment: This type of split payment allows customers to pay the full amount of the purchase in two or more installments. The first payment is usually a down payment, with the remaining amount split into smaller installments.
- Recurring Payment: This type of split payment allows customers to pay for goods or services in smaller amounts over a period of time. This type of split payment is usually used for subscription services, such as a streaming service or a gym membership, where customers can pay for the service in regular monthly payments.
Steps of Split payment
Split payment involves several steps, beginning with the customer selecting the item they would like to purchase.
- Selection of item: The customer selects the item they wish to purchase, and the total cost of the item.
- Down payment: The customer then pays a down payment, which is usually a percentage of the total cost.
- Payment installments: The remaining amount is then split into installments, with each installment having a due date.
- Paying off the installments: On each due date, the customer pays off their installment until the total amount is paid off.
Advantages of Split payment
- Easier budgeting: Split payment allows customers to spread out the payment of a large purchase over a period of time, making it easier to budget.
- Increased sales: Merchants can increase their sales by offering the option of split payment as it makes it easier for customers to make a purchase.
- Reduced risk of default: As customers are only able to access a small amount of the total payment at a time, merchants are less likely to be affected if a customer defaults on their payments.
Limitations of Split payment
Split payment also has some limitations, such as:
- Additional costs: Split payment methods may incur additional costs in the form of interest or fees, which may add up to be more expensive than paying upfront.
- Access to funds: The merchant may not be able to access the funds until the final payment is made, which could cause cash flow issues.
- Credit risk: The merchant may be at risk of not receiving the full amount in the end if the customer defaults on any of the payments.
Split payment involves other approaches as well, such as payment in kind, deferred payment, and installment payment.
- Payment in Kind: Payment in kind involves paying for goods or services with non-monetary items, such as goods or services.
- Deferred Payment: Deferred payment allows customers to pay for goods or services at a later date, usually after the goods or services have been received.
- Installment Payment: Installment payment requires customers to pay for goods or services in fixed amounts over a certain period of time.
These approaches to split payment can be used in combination to provide customers with more options to purchase goods or services. They also provide merchants with more flexibility in terms of pricing and payment.
- Kowal, A. (2019). Split payment mechanism in the economy of small and medium-sized enterprises. Zeszyty Naukowe Małopolskiej Wyższej Szkoły Ekonomicznej w Tarnowie, (4 (44)), 39-51.
- Eckey, L., Faust, S., Hostáková, K., & Roos, S. (2020). Splitting payments locally while routing interdimensionally. Cryptology ePrint Archive.