You guys do not seem to understand how the system works. There...

You guys do not seem to understand how the system works. There was a 45 minute interview from Alan Kohler yesterday that pretty clearly went through everything. Here are the main points to take out.
There are currently two models for retail,
1. The 1.5%merchant fee - the customer selected installment payment plan where the retailer receives the installment as soon as splitit recieves the payments.
2. The up front payment where the retailer receives the full amount from Splitit. Splitit gets credit ( looks like this is the 4-5% they are advertising ), and passes both the interest on credit and the splitit fee ~2% charge to the merchant - so that the retailer wears both, while splitit receives the customer selected payment plan over time.

There is almost zero risk to splitit, as what they actually do is place a hold on the amount owing onto your credit card as security - like a hotel does when you stay and they scan the card to hold for minibar / food services. As you make payments, the hold is reduced to match the total owing. If you fail to make a payment then splitit charge your credit card and splitit receives the full amount owed in all cases. The Credit card issuing bank then charges your credit card as if you have had a purchase owing for X months - and basically they are wearing the risk, as they were the ones who issued your credit limit in the first place. Win for Splitit, and win for banks if people default ( ie the bank is then owed interest from the credit card customer ). As this business model is so low risk, I imagine the borrowing to cover option 2, would be pretty cheap, as it is guaranteed by the credit issuing bank.

To use Visa / Mastercard system you need to be a tier 3 member, which took splitit 3-4 years to get, they have patents it sounds like for putting a hold on the card, and then having the first payment made immediate to the retailer - which makes it sound like other options would not involve the retailer receiving immediate partial payment - all would be deferred. Obviously as a retailer the earlier you get the payment the better - so win for splitit if that is the patent coverage.

They mentioned that 60% of current merchants opt for the 1.5% fee and accept later payments, and 40% of current merchants require upfront. They did expect these stats to switch the other way around shortly with the forecast new growth.

Awesome business model - basically Paypal in installments, and we all know how good Paypal is.