The explosive growth of such services — which have jumped as much as 200 percent during the coronavirus pandemic — coincides with two key trends of the public health and economic crises: The shift to online shopping and a growing distrust of credit cards, particularly among younger shoppers.
“It’s a perfect storm of the pandemic, plus online shopping and people being more debt-averse,” said Ted Rossman, an analyst at Creditcards.com. “But the concern, as with any sort of debt, is that you’ve got to pay it back. … There’s a risk of overextending yourself.”
Most services require basic information, such as the applicant’s date of birth and phone number, and sometimes they run a credit check, though executives said it is not required. Customers also are asked to provide a credit or debit card to backstop their payments, though the vast majority — 90 percent at Afterpay, for example — use debit cards.
Payments are typically deducted every two weeks until a purchase has been paid off. If a user falls behind, some services charge late fees in lieu of interest — at Klarna, for example, it’s $7 — and restrict users from making more purchases until they’ve cleared their balances.
For apparel and beauty retailers, the payment programs have become a way to reach uncertain shoppers during turbulent times. Many of the services come with snappy names like Bread, Sezzle and Splitit, and are easier to market online than store credit cards, Rossman said. He noted that retailers often shoulder higher processing fees for each pay-later transaction — about 6 percent instead of 3 for a typical credit card transaction.
Shoppers who use pay-later options also tend to spend more and buy more frequently than those who do not, he said. A recent Bank of America analysis predicted that such services could grow as much as fifteenfold to an annual value of $1 trillion by 2025.
“We’re unlocking a younger audience and debit-card consumers,” said David Sykes, head of Klarna U.S., which is adding 1 million users a month to a roster that stands now at 14 million. “After the global financial crisis [of 2008], young consumers in particular became much more skeptical of traditional banks and credit card companies.”
About 85 percent of users, he said, use debit cards instead of credit cards to back their purchases.
Ysanne Latchman began using Afterpay during the summer, when she wanted to buy a pair of Quay sunglasses for her sister’s birthday. Since then, she’s used the service a handful of times for items that she wouldn’t otherwise buy, such as Birkenstock sandals and Fenty face cream.
“I don’t have a large income — I make under $30,000 a year — so this allows me to have the things that I want without having to pay a few hundred dollars all at once,” said Latchman, 44, who lives in Brooklyn and was laid off from her job at an airport food court in April. “Four payments across a month or two gives me a lot of breathing room.”
Fashion and beauty products make up about 70 percent of pay-later transactions, analysts said. The purchases tend to veer toward everyday items: Old Navy thermals and Crocs clogs were among the most frequent holiday purchases among Afterpay’s 13 million U.S. shoppers, according to the company.
It’s growing quickly: In Australia, the service is so widely used that consumers can pay for just about anything — including airline tickets and dentist visits — in installments, said Nicholas Molnar, chief executive of Afterpay’s U.S. operations. He added that 95 percent of purchases are repaid on time, a figure that has remained steady during the pandemic.
“For many, buy now, pay later feels like a more responsible form of debt,” Rossman said. “Open-ended credit card debt scares people, especially young people. They already have a lot of student loans and don’t want to take on more debt, knowing it can come with hefty interest rates.”
Fifty-one percent of Americans with credit card debt have added to their debt load during the pandemic, according to January figures from Creditcards.com. Millennials were the most affected, with 56 percent having taken on more debt since March.
Angela Smith had been eyeing a high-end Peloton exercise bike for months but wasn’t sure it was worth the $1,900 dent in her savings.
On Black Friday, she saw an offer she couldn’t resist: The option to spread the purchase over 36 months using Affirm, a pay-later service that makes nearly one-third of its revenue from Peloton.
“Seeing that option definitely tipped the scales for me,” said Smith, a business analyst in St. Louis. “I feel much better about it paying $52 a month.”