San Francisco – As Americans shop for the holidays, they’ll likely see a swarm of offers to get their freebies now, but pay for them later in fixed monthly installments.
Powered by several hot Silicon Valley startups as well as major credit card companies, “buy now, pay later” is now available for the purchase of a $ 1,500 Peloton exercise bike as well as of a floral bouquet at $ 60. Thousands of retailers large and small often have the option on their websites to pay for a purchase in installments at checkout. In the case of credit cards, customers are allowed to create fixed payment plans days or even weeks after purchase.
Americans seem to be impatient to try this financial option, which has been common outside the United States for some time. A major credit card company says about six of its 10 U.S. customers have launched a buy now, pay later program for the first time this year, and the Silicon Valley-backed companies that offer these plans are seeing savings. tens of thousands of new customers. every week.
“My shopping habits can be a bit impulsive, so I like the ability to split them up into multiple payments,” said Shahin Rafikian, 26, who lives in Los Angeles and has used multiple shopping services now, of subsequent payment to purchase concert tickets, vinyl records and other items.
Rafikian said he likely would have bought fewer high-value items if the cost had simply been passed on to a credit card that was never refunded.
Advocates say that buy-now, pay-back programs are preferable to credit cards because there are fixed monthly payments and any interest is clearly stated in advance. Consumer advocates, generally skeptical of any new financial product, have also been relatively more positive about buying now, paying later, as any plan would have a start and end date. Most of their concerns are about the fees that could be associated with late payments.
“These products encourage people to pay for their purchases faster and usually with less interest, but if people use them to just buy more than they should and go above and beyond, pay late fees, etc., help. they really manage people’s expenses? ”said Lauren Saunders, associate director of the National Consumer Law Center.
Adobe Digital Economy Index, which analyzes direct online consumer transactions. said revenue from the Buy Now and Pay Later plans increased 21% from a year ago.
Buying now, paying later is not a new product – services or products like layaway, monthly payments for large purchases, and even retail credit cards have been around for decades. What is different is the way it is delivered and who provides the service.
Instead of asking a customer to apply for a store-branded credit card, which often can only be used at that one retailer, companies have added financing options provided by third-party companies such as Affirm, Afterpay, or PayPal. when paying online.
There are generally two different types of buy-now and pay-on-payment services: short-term payment plans that divide a purchase into four or six bi-weekly payments, and long-term loan-type products offered by Affirm.
PayPal co-founder Max Levchin started Affirm in 2012. The $ 32 billion company went public this year and made Levchin the last PayPal alumnus to become a billionaire.
With its buy now, pay later widget on the websites of many retailers, the company has experienced extreme growth over the past few years. Affirm said in November that 8.7 million Americans were using its services buy now, pay later, more than double the levels a year ago. The company signed 1.6 million new clients in the United States and Canada in the past 90 days.
Tens of thousands of Americans have learned about Affirm and the buy now, pay later option through its partnership with exercise equipment company Peloton.
One of them is Fallon Oeser, a 26-year-old content strategist who lives in Ohio. She bought a Peloton bike in the summer of last year, when the lockdown drew many Americans to home exercise equipment.
“I have student loans, so I knew I was taking some responsibility here by taking out a loan. But it made the purchase more accessible and it worked for my budget, ”she said.
Levchin, 46, said he started Affirm in part because, when he was younger, credit cards ruined his credit and buried him in interest and fees. He said he wanted to create a financially healthier product that would allow people to buy things on credit.
“We knew it was going to be huge a long time ago. It’s just at the current scale where it’s virtually impossible to ignore it, ”Levchin said in an interview in San Francisco.
The option to spread more common purchases over time is going to be even more prevalent in the months to come. At a cafe, Levchin paid for a $ 22 lunch by dividing the payments into four bi-monthly installments of $ 5.50. The company is testing a debit card that will allow customers to decide whether to pay for a purchase in total or spread it over time.
The cost of paying over time may vary with Affirm and other Buy It Now, Pay On Later providers. A six to eight week purchase may bear no interest like the $ 22 lunch. In some cases, the merchant has decided to pay the interest for the customer. But other consumers could pay up to 30% annual interest on those big purchases with Affirm.
Afterpay does not charge interest on its purchases, but charges borrowers a late fee if they miss a payment, up to 25% of the loan value. Affirm does not charge late fees on purchases, but is generally willing to lend larger amounts and charge interest on longer term loans.
The interest in buying now, paying later does not seem to be slowing down.
A September study written by consulting firm Accenture, but commissioned by AfterPay, estimates that about 6% of all dollars spent online will be spent on buy-it-now and pay-back programs by the end of the month. ‘year. This figure is expected to represent 13% of all spending by 2025. This figure was practically zero a few years ago. Two major retailers – Wal-Mart and Target – have partnered with Buy Now, Pay Later companies like Affirm. Wal-Mart got rid of its buy now, pay later layaway program.
Credit card companies, seeing the potential impact of buying now, paying later on their business model, have tried to adapt. American Express, JPMorgan Chase, and Citigroup now all offer similar payment plans for items purchased with their cards. A report by consulting firm McKinsey found that buy now pay, subsequent startups embezzled between $ 8 billion and $ 10 billion in revenue from traditional banks that would likely have funded those purchases a few years ago.
AmEx said 58% of its customers have implemented a purchasing plan for the first time this year, and more than $ 5 billion in purchases have been placed on “Pay It, Plan It” agreements.
The rapid growth of buying now, paying later has also attracted the attention of politicians and regulators. The House Financial Services Committee held a hearing on buy now, pay later programs earlier this month, in which politicians called on the Consumer Financial Protection Bureau to put more emphasis on monitoring the growth of this type of financing.
“These products raise important questions about the use of consumer data, the exploitation of spending models, the enforcement of loan laws and the potential for unsustainable consumer debt levels,” said the representative. Steven Lynch, D-Massachusetts.
The concern about overspending with these programs is real, Rafikian said.
“At first it was fun to have access to items generally out of my price range, but sometimes you’re surprised and a little unhappy to have all these new payments due,” he said.