Want to buy a new coat without paying the full cost up front? For buyers, this is becoming an increasingly popular payment option, generating a windfall for the handful of companies that facilitate such services.
What’s happening: Square, owner of Cash App, announced on Sunday that it is buying Afterpay for $ 29 billion, the biggest acquisition ever by an Australian company.
Meanwhile, Sweden’s Klarna raised funds in June at a valuation of nearly $ 46 billion. Affirm, a San Francisco company that went public earlier this year, is now valued at nearly $ 15 billion (and its stock is up 8% in pre-market trading).
How it works: These companies are partnering with retailers like Target, H&M, Sephora, Macy’s and ASOS online or in stores to offer customers the option of paying in installments at checkout. This allows buyers to pick up a $ 200 purse for the initial cost of just $ 50 without having to undergo a credit check. The remainder is repaid in installments over the next few months, often without interest.
A company like Afterpay immediately covers the full cost to the retailer, less fees.
The so-called “point-of-sale” loan has been around for decades. But the service has exploded alongside the surge in online shopping during the pandemic, which also ushered in significant financial instability for many households.
According to Adobe, “buy now, pay later” saw 215% year-over-year growth in the first two months of 2021. Researchers noted that more retailers are signing up, which is This makes sense given that consumers using the service place orders that are 18% larger than buyers who do not.
“Trends that are fueling growth include digitization, increasing adoption by merchants, increasing repeat use among younger consumers and a growing number of players,” McKinsey said in a report released last month.
Please note: PayPal rolled out its own service last year. During the company’s earnings call last week, executives said its ‘Buy Now, Pay Later’ product recorded payments of $ 1.5 billion in its most recent quarter, and that more of 7 million customers had now completed more than 20 million transactions.
Veterans who have historically controlled the payments industry are also paying attention. McKinsey estimates that the popularity of “buy now, pay later” options diverts banks up to $ 10 billion in annual revenue.
A Few Caveats: Consumer Reports warns that customers should be careful about what they’re signing up for. While many “buy now, pay later” companies offer zero-interest loans – tempting to those looking to avoid accumulating credit card debt – a number also have interest-bearing products. Actual conditions may also vary by retailer, while late installments may incur charges.
Regulators are starting to monitor this space. Earlier this year, the UK’s Financial Conduct Authority said “buy now, pay later” credit agreements would now be part of its portfolio.
“Although the average transaction tends to be relatively small, buyers can make multiple deals with different vendors,” the agency said. “It would be relatively easy to accumulate around £ 1,000 ($ 1,391) in debt that credit reference agencies and traditional lenders cannot see.”
There’s more: “With many Buy-It-Now suppliers planning to expand to higher-value retailers or offer their products in-store, the risk of consumers taking on unaffordable debt increases. “
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