And retailers from Amazon to Walmart to your neighborhood store are also buying.
The option to buy now and pay later has grown in popularity, accelerating over the past year as consumers buy almost everything online at the start of the pandemic. But the little buttons under those Lululemon leggings or that new TV that suggest spreading your purchase over six weeks or more – often at no cost – should change spending habits in a lasting way.
“I think of it as a credit card, with no interest,” said Jenna Kellett, 27, a personal assistant in Dublin, Ohio, who was a fan enough of one of the major services, Afterpay, to become a moderator on a Facebook Group. where members follow new features and follow participating retailers.
If you’ve never come across a later payout option, you will soon. A major supplier, Affirm, last week announced an agreement to offer its service on Amazon, the country’s largest retailer. And Square, the payments company run by Twitter CEO Jack Dorsey, agreed in early August to acquire Afterpay for $ 29 billion, a deal that will open up installment payments to millions of small businesses that process sales through l Square app.
Young adults – who have now gone through two major economic upheavals – have embraced the services, in the same way they favored debit cards over credit and all that that means.
“Their preferences are starting to become the trend,” said Nick Molnar, co-founder and co-CEO of Afterpay, who said 90% of company users pay later with a debit card.
Afterpay and Affirm, along with competitors such as Sezgle, Klarna and Zip, are just beginning to enter territory long dominated by credit cards, which accounted for 30.4% of online sales in the United States last year. That’s much more than the 1.7% paid services later. But their share is expected to nearly triple to 4.8% of sales – or $ 79.7 billion – by 2024, according to Worldpay, a payment processor. They are already more established abroad: late payment accounts for 23% of online transactions in Sweden, almost 20% in Germany and is also popular in Norway, Finland, Australia and New Zealand.
“There was already growth before the pandemic,” said Ginger Schmeltzer, senior analyst for research and consulting firm Aite-Novarica, which estimated there were around 125 million paying users later in the year. six major global vendors, although this includes people using multiple platforms. “Now it’s like a hockey stick. What we are seeing is that it is not slowing down.
The idea is simple: the purchase price is usually divided into four interest-free installments, with the first payment usually due at checkout. It’s seamlessly integrated into the shopping experience, providing almost immediate approval – sometimes not even requiring a so-called soft credit check, which doesn’t affect your credit score in any way. There is usually no additional charge if you pay on time, although some services, including Affirm, may charge interest to certain consumers using certain payment products.
Many vendors will also allow consumers to create a virtual card in minutes, with hundreds of dollars to spend at participating retailers. Some of the apps also serve as online marketplaces, listing participating merchants and connecting directly to their online stores.
This is how Kellett stumbled upon a recent obsession: Surf’s Up Candle, based in Belmar, New Jersey, was listed on the Afterpay app.
“I would never have known their brand existed,” she said.
This is part of the appeal to merchants – even though subsequent payment services can be three times more expensive to offer than credit cards, costing these businesses between 2% and 8% of the transaction amount, according to Jefferies. , a financial services company.
“It definitely makes them spend more,” said Michelle Fontanez, who started Surf’s Up Candle with a slow cooker in her kitchen in 2014 and now has 60 employees and a store.
She added Afterpay last year and Shop Pay this year.
“People love to pay and not have to pay in full,” Fontanez said.
But consumer advocates are concerned about the potential implications of these growing services. Payment later usage is usually not reported to credit bureaus such as Equifax and TransUnion, so there’s nothing stopping people from juggling multiple services. And their different policies can lead to unpleasant surprises.
“They work differently and you have to dig deep into the weeds to determine the cost to you,” said Rachel Gittleman, financial services and member outreach manager at the Consumer Federation of America.
Late payment services typically charge late fees for missed payments, starting at around $ 7 each and sometimes capped at 25% of the total spent. They will cut users off until they catch up and can reduce their purchasing power once they do. And although several providers say they don’t report payment behavior or unpaid debts to the credit bureaus, serious defaults can eventually emerge. Some companies, including Affirm, Afterpay, Klarna, and Zip, reserve the right to send the account to a collection agent, which may result in repeated phone calls or other efforts to collect outstanding balances.
But Sezzze CEO Charlie Youakim said his company allows users to choose to have their payment records reported – good and bad – to help build their credit history. Fifteen percent of Sezzle’s 3 million active users don’t have one, he said.
“If we don’t report, we don’t help them take the next step,” Youakim said.
Chuck Bell, director of advocacy programs at Consumer Reports, said users should ask questions when signing up.
“When trying to interpret a loan agreement on your smartphone, you can miss critical details if you click too quickly,” he said. “Are there late fees? Will they refer you to collections? “
So far, late payment businesses report having few bad debt issues. But that might not be the case for some of their users. If struggling consumers automatically make their payments from a depleted bank account, they can fall further behind. Some have taken legal action claiming that late payment services policies have caused them to incur significant overdraft fees. Other lawsuits claim the services continued to attempt collections even after consumers filed for bankruptcy.
“Users can find themselves unable to pay periodic repayments and turn to credit cards or other forms of high interest debt,” said Joyce Fargas, senior director of Fitch Ratings who co-wrote a report in July on the industry.
In Australia, where late payment accounts for around 10% of online transactions, a regulator found in November that 15% of users had taken an additional loan the previous year to meet their obligations on time, according to the report.
Late payment services can fall into a gray area due to the length and terms of their products. They don’t offer the same litigation protections consumers expect from credit card providers, the Consumer Financial Protection Bureau said, and getting refunds can be more complicated.
And last year, the California Department of Financial Protection and Innovation temporarily halted major players’ core activities and asked them to reimburse nearly $ 2 million in fees after concluding that they had structured their products to evade regulations. To do business in the state, they must now be approved lenders, which means considering the ability of consumers to repay loans, caps on rates and fees, and responding to consumer complaints.
The services also require some self-regulation, users said.
Kimberly Williams, an avid user of several services, said she would only recommend them to people with financial demands.
“You can’t use these types of plans and not be fully in step with your finances, how they work and what you can afford,” said Williams, 42, manager of a healthcare research site. health.
Williams previously worked as a wardrobe stylist and has a side business designing clothing made in Lagos, Nigeria. She spends part of her monthly budget on shopping for clothes that she often resells, which makes late payment an attractive option.
As she used the services more, they increased her purchasing power – $ 10,000 at Affirm, compared to $ 2,000 – and she gained perks, such as free shipping and the option of an additional two weeks to complete her service. first payment.
“The rewards, the benefits, the increased availability to spend – it comes to you quickly,” she said. “It’s getting more and more tempting.