Remember layaway? That old-fashioned system of shopping, which allowed customers to pay for items over the course of several installments, has gotten a digital makeover for the modern age.
Services — from the companies Afterpay, Quadpay, Sezzle, Affirm and Klarna — are popping up at the checkout of more and more online stores, offering to help cover the cost of an online purchase by spreading out payment.
But whereas layaway, which became popular in the 1920s and ’30s as a method for buying cars, radios, vacuum cleaners and other household items, is a system in which the consumer has to wait to own the item, buy-now-pay-later services provide instant gratification.
You may have already seen them beckoning, with offers that appear on the websites of Reformation, Urban Outfitters, Cole Haan, Mansur Gavriel, Ugg and Warby Parker. They have tag lines like: “Payment can wait. Your new look can’t,” and “Shop Now. Enjoy Now. Pay Later.”
Instead of shelling out, say, $140 dollars for an Anthropologie dress, the buyer can make “four interest-free installments of $35.00” to Afterpay instead.
Consumer advocates cautioned that buy-now-pay-later services are still in early stages, and their downsides remain to be seen. “It’s like having a new drug on the market,” said Linda Jun, a senior policy counsel at Americans for Financial Reform.
“Traditionally the installment plan was for lower-income people who needed to buy an oven or a refrigerator,” she said, adding that using Afterpay or Affirm can be helpful to someone on a tight budget or without a good credit score — as long as they pay on time.
But the services are aiming at “a specific group of people who have trouble resisting or waiting,” Ms. Jun said.
“They get you right when you’re about to pay,” said Arielle O’Shea, a personal finance expert at NerdWallet. “You get to the checkout on the website and it says you can pay this off in installments and you’re like, ‘I can add a little more to my cart.’”
Late Fees, but No Interest (Unless There’s Interest)
To use these services, you simply need to make an account, give the company your payment information and submit to a short approval process. The first payment is due immediately, and the rest can be paid automatically in increments (usually every two weeks; Affirm and Klarna offer more customized repayment plans).
In many cases, the services are interest-free, but come with late fees that range from $7 to $10 per installment. (Affirm does charge interest but allows for a longer-term repayment period; Klarna offers several options for payment, some of which charge interest.)
Afterpay, a public company, was criticized last year because nearly a quarter of its income came from late fees. Since then, it has implemented a late-fee cap and it said that its share of late-fee revenue dropped to about 17 percent.
For customers like Katie Hatcher, a 24-year-old marketing manager who lives in Kansas City, Kan., being able to borrow money without using a credit card is a huge draw. “I had bad experiences with credit cards when I was younger,” she said.
With Afterpay, she said, there is no interest, so “it’s the same amount you would pay the original retailer.” (Nick Molnar, the chief executive of Afterpay, said that 85 percent of the company’s customers use a debit card, rather than credit, to pay back their loans.)
Ms. Hatcher was excited to see that some of her favorite retailers, like Urban Outfitters and Dolls Kill, teamed up with the service. She recalled spending about $230 on boots and tops almost immediately. “I have five purchases out right now,” Ms. Hatcher said. “I buy something with every paycheck.”
After credit cards gained popularity in the 1980s, many stores stopped offering layaway, but the practice of paying in installments re-emerged during or after the Great Recession in stores like Sears, Toys “R” Us and Wal-Mart.
Companies like Afterpay operate off the premise that the younger generations are more open to them because they came into adulthood under the cloud of the recession. “A lot of young people grew up during the crisis and saw the worst effects of credit,” said David Sykes, the chief operating officer of Quadpay. “They’re fairly skeptical of traditional finance companies.”
To make money, buy-now-pay-later services charge merchants and retailers a fee of 4 to 6 percent per transaction — double what a credit card company typically charges. In exchange for higher fees, merchants are promised new millennial and Gen Z customers, more repeat visits and more spending.
Afterpay said its average user is 31 to 33 years old. Sezzle, another buy-now-pay-later company, said that nearly half of its 500,000 customers are younger than 29.
Mike Karanikolas, a founder and co-chief executive of Revolve Clothing, said that with Afterpay, his company saw more repeat customers, and at a younger age bracket. They are the kind of customers, he said, “who are stretching a little more on their budget to make their Revolve purchase.”
If It Works and Sounds Like a Credit Card …
Quadpay recently introduced a virtual card in partnership with Visa that can be used online and at any brick-and-mortar store that accepts Visa. The retailer won’t even need to be an official partner of Quadpay, the company said.
To use the card, the customer must request a line of credit for a certain amount — say, $200 — and Quadpay will create a virtual Visa card, and the customer can then buy groceries, makeup, concert tickets or whatever else at 25 percent of the cost up front. The rest of the payment is then owed to Quadpay, which pays the full amount on the customer’s behalf.
The other payment plan services are expanding, too. Afterpay, which started in Australia in 2015 and in the United States last summer, counts 3.5 million people as users.
Jeff Silverman, the president of global e-commerce at Steve Madden, said that when Afterpay approached him about a year ago, he initially wrote off the service. But after consulting with a distributor in Australia, where about 10 percent of the adult population has used some sort of buy-now-pay-later arrangement, Mr. Silverman decided to try it for Steve Madden.
Now, Afterpay has replaced PayPal as the second-most-used payment method for the shoe company after credit cards, he said.
Most buy-now-pay-later companies say they decide whether to approve customers for their services within minutes. Some perform light credit checks, but Afterpay doesn’t, saying that only 1.2 percent of its customers fail to pay entirely. Quadpay boasted that 95 percent of users pay on time.
But just because buy-now-pay-later plans are mostly interest free and perhaps somewhat upfront about the terms of repayment, they are not a radical departure from credit cards. When customers fail to make payments, their debt can be sent to a collection agency or reported to a credit bureau, affecting their credit scores. (Afterpay said it does not report to credit bureaus.)
“The irony is that it’s a version of credit,” said Shannah Compton Game, a financial planner and the host “Millennial Money,” a podcast. “You’re just not using your credit card.”
“Any service that encourages you to spend more money than you have can be a little bit dangerous,” Ms. O’Shea, of NerdWallet, said. With buy-now-pay later services, “the temptation is enhanced,” she said. “It definitely has a feeling of spontaneity.” But, she added: “Buy the things you can afford is a better mantra.”
Valeriya Safronova is a reporter for the Style section. She is based in New York. @vsaffron
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