‘Buy now, pay later’ threatens vacation shoppers, retailers – here’s why

Editor’s Note: Joshira Maduro is a research analyst at Charlotte-based LendingTree.

CHARLOTTE – Modern layoff has a time. Companies that allow shoppers to purchase items online on installment plans – known as “buy now, pay later” – are some of the hottest companies in the tech world, and small businesses are taking note.

In August, the small business payment processor Square announcement it would buy one of the biggest buys now, later pay the companies, Afterpay, for $ 29 billion. This agreement came about just a few weeks before the payment company PayPal purchased Japan-based Payy for $ 2.7 billion.

These mind-blowing price tags are the result of a booming business. Buyers had an outstanding balance of more than $ 100 billion through buy now, later paying businesses in 2020, according to McKinsey consulting firm data. This figure is expected to grow by up to 20% per year over the next several years, overtaking private label credit cards and soon rivaling the personal loan market. More than half of the country has now tried one of these services.

Giant companies like Macy’s, Bed Bath & Beyond and Amazon have already teamed up to Buy Now, later pay companies to offer these unsecured loans to their customers. Small businesses are starting to do the same. Affirm has partnered with Shopify, a popular online store platform for small businesses, and Square’s acquisition of Afterpay means even individual businesses may soon have access to these services.

But it would not be without risk. Buy Now, Pay Later Businesses make money on transaction fees that could drastically reduce a small business’s bottom line. They also add to their customers’ consumer debt, potentially damaging their long term financial health. If you rely on their loyalty, this can be a problem.

“It’s really about meeting the needs of the younger generation consumers, which are cash flow,” said Tariq Bokhari, executive director of the Carolina Fintech Hub in Charlotte, North Carolina. “If done correctly, the advantages outweigh the disadvantages.”

How to buy now, pay later works

If you shop online, you’ve probably come across buy now, pay later packages. If online retailers have partnered with one of these companies, you will likely see an offer to split your payment when you go to the cart or checkout screen.

These services can be used on purchases as small as $ 100 or as large as several thousand dollars. If you’re approved, you may be able to split the total cost into four payments or pay monthly for three to 12 months, depending on the service. The service works as a short-term loan, and it is a particularly attractive offer for customers with high credit utilization or low credit scores who cannot claim credit cards.

Affirm, Afterpay, Klarna, and Zip (formerly known as QuadPay) are some of the largest buy it now and pay after companies. All of them have slightly different offerings, but the main business model is the same:

Businesses sign up for one of the services, and the buy now, pay later software integrates with the retailer’s online payment system. If a customer chooses to use the service, the Buy Now, Pay Later company handles the funding. Business owners are paid full price immediately, while their customers are able to pay over time.

Buyers may not have to pay interest or charges if payments are made on time. Instead, retailers pay a fee to provide the service. Retailers typically pay a transaction fee of around $ 0.30 plus 5.99% of the purchase price.

Should Small Businesses Try It?

Buy now, pay later, businesses are touting the benefits they offer businesses. Businesses claim that they increase the conversion rate of people who shop, dramatically increase repeat purchases, and lead to a higher average amount spent per order. Affirm Holdings even claims that purchases are on average 85% larger.

But industry watchers warn there are downsides, too. On the one hand, the transaction and processing fees charged can eat into the already slim profit margins of a small business. Retailers can also be concerned about their customer experience if a purchase needs to be redeemed. A buy now, pay later plan can be a headache if products need to be returned. These companies do not offer the same protections as traditional credit cards, according to the Consumer Financial Protection Bureau. Dispute charges and return item policies may vary.

But the real problem with buy now, pay later is that this type of easy credit can also increase customers’ financial hardship. Research is already showing that some 17% of Americans have $ 10,000 or more in credit card debt. But since many buy now, pay later, businesses don’t perform credit checks on their customers, people who wouldn’t be approved for more traditional credit may be able to sign up for one of these. installment plans.

This means that people who have run out of credit cards can buy now, pay businesses later to continue shopping, take on more debt rather than improve their credit rating. About 57% of people who have used these services say they made a purchase that they regret because it was too expensive, according to CR Research. About the same percentage are behind in their payments, which exposes them to late fees and hits on their credit scores.

“The concern is whether customers have enough financial knowledge to understand what they are signing up for,” Bokhari said, adding that retailers should make sure their customers are made aware of the financing and payout plans on offer. . “Everyone who touches this has a responsibility. “

Instead of offering buy-now and subsequent payment services, small businesses have other options for retaining customers. They can choose to create a rewards program for loyal customers that will keep them coming back in the New Year. They can also choose to use discounts, which could mean that their customers don’t need to put things aside at all.

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