That $128 pair of jeans can now be had for just four payments of $32. Dropping $100 on cosmetics seems less indulgent when the transaction is broken up into $25 payments. Even a pricey Dyson vacuum can be rationalized when purchased in $125 installments.<\/p>\n
And retailers from Amazon to Walmart to your neighborhood boutique are buying in, too.<\/p>\n
The option to buy now and pay later has soared in popularity, accelerating last year as consumers bought 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 \u2014 often at no cost \u2014 are expected to change spending habits in lasting ways.<\/p>\n
\u201cI think of it as a credit card, without interest,\u201d said Jenna Kellett, 27, a personal assistant in Dublin, Ohio, who was enough of a fan of one of the leading services, Afterpay, that she became a moderator on a Facebook group where members track new features and follow participating retailers.<\/p>\n
If you haven\u2019t encountered a pay-later option before, you will soon. One major provider, Affirm, announced a deal last week to offer its service on Amazon, the nation\u2019s largest retailer. And Square, the payments firm run by the Twitter chief executive Jack Dorsey, agreed to acquire Afterpay for $29 billion in early August, a deal that will open installment payments to millions of small businesses that process sales through Square\u2019s app.<\/p>\n
Younger adults \u2014 who have now lived through two major economic upheavals \u2014 have embraced the services, similarly to the way they\u2019ve favored debit cards over credit and all that it represents. \u201cTheir preferences are starting to become the trend,\u201d said Nick Molnar, co-founder and co-chief executive of Afterpay, who said 90 percent of the company\u2019s users pay later using a debit card.<\/p>\n
Afterpay and Affirm \u2014 along with competitors like Sezzle, Klarna and Zip \u2014 are only beginning to push into territory long dominated by credit cards, which accounted for 30.4 percent of online sales in the United States last year. That\u2019s far more than the 1.7 percent from pay-later services. But their share is expected to nearly triple to 4.8 percent of sales \u2014 or $79.7 billion \u2014 by 2024, according to Worldpay, a payment processing firm. They\u2019re already more established overseas: Pay-later accounts for 23 percent of online transactions in Sweden, almost 20 percent in Germany and is also popular in Norway, Finland, Australia and New Zealand.<\/p>\n
\u201cThere was already growth before the pandemic,\u201d said Ginger Schmeltzer, a senior analyst for the research and advisory firm Aite-Novarica, which estimated there are about 125 million pay-later users at the top six providers worldwide, though that includes people using multiple platforms. \u201cNow, it is like a hockey stick. What we are seeing is that it is not slowing down.\u201d<\/p>\n
The idea is straightforward: The purchase price is usually split into four interest-free installments, with the first payment generally due at checkout. It\u2019s smoothly embedded in the shopping experience, offering almost immediate approval \u2014 sometimes not even requiring a so-called soft credit inquiry, which doesn\u2019t affect your credit score in any case. There are generally no finance charges, or additional fees if you pay on time. But some services, including Affirm, may charge interest to some consumers using certain payment products.<\/p>\n
Many providers will also let consumers create a virtual card in just a few minutes, with hundreds of dollars made available to spend at participating retailers. Some of the apps double as online marketplaces, listing participating merchants and linking directly to their online stores.<\/p>\n
That\u2019s how Ms. Kellett stumbled on a recent obsession: Surf\u2019s Up Candle, based in Belmar, N.J., was listed on Afterpay\u2019s app. \u201cI would have never known their brand existed,\u201d she said. <\/p>\n
That\u2019s part of the lure for merchants \u2014 even though pay-later services can be three times as expensive to offer as credit cards, costing those businesses between 2 percent and 8 percent of the transaction amount, according to Jefferies, a financial services firm.<\/p>\n
\u201cIt definitely makes them spend more,\u201d said Michelle Fontanez, who started Surf\u2019s Up Candle with a crockpot in her kitchen in 2014 and now has 60 employees and a retail location. She added Afterpay last year, and Shop Pay earlier this year. \u201cPeople love to pay it off and not have to pay in full,\u201d she said.<\/p>\n
But consumer advocates worry about the potential implications of these growing services. Pay-later usage generally isn\u2019t reported to credit bureaus like Equifax and TransUnion, so there\u2019s nothing stopping people from juggling multiple services. And their varying policies can lead to unpleasant surprises.<\/p>\n
\u201cThey work differently and you have to dig deep in the weeds to figure out the cost to you,\u201d said Rachel Gittleman, financial services and membership outreach manager at the Consumer Federation of America.<\/p>\n
Pay-later services usually charge late fees for missed payments, starting around $7 each and sometimes capped at 25 percent of the total spent. They will cut off users until they catch up, and can reduce their spending power once they have.<\/p>\n
And though several providers say they don\u2019t report payment behavior or outstanding debts to the credit bureaus, serious delinquencies may show up eventually. Some companies, including Affirm, Afterpay, Klarna and Zip, reserve the right to send the account to a debt collector, which can lead to repeated phone calls or other efforts to recover outstanding balances.<\/p>\n
But Sezzle\u2019s chief executive, Charlie Youakim, said his company allows users to opt in to having their payment record \u2014 good and bad \u2014 reported to help build their credit history. Fifteen percent of Sezzle\u2019s 3 million active users don\u2019t have one, he said. \u201cIf we don\u2019t report we aren\u2019t helping them get to the next stage,\u201d Mr. Youakim said.<\/p>\n
Chuck Bell, programs director of advocacy at Consumer Reports, said users need to ask questions when they sign up. \u201cWhen you are trying to interpret a lending agreement on your smartphone, you can miss critical details if you click through too quickly,\u201d he said. \u201cAre there late fees? Will they refer you to collections?\u201d<\/p>\n
So far, pay-later companies say they have few problems with bad debts. But that might not be the case for some of their users. If struggling consumers make their payments automatically from a tapped-out bank account, they can fall further behind. Some have filed lawsuits claiming pay-later services\u2019 policies caused them to incur significant overdraft charges. Other suits claim that the services continued to attempt collections even after consumers filed for bankruptcy.<\/p>\n
\u201cUsers may find themselves unable to afford the periodic repayments and may turn to credit cards or other forms of high-interest debt,\u201d said Joyce Fargas, a senior director at Fitch Ratings who co-wrote a report in July on the industry.<\/p>\n
In Australia, where pay-later accounts for about 10 percent of online transactions, a regulator found in November 2020 that 15 percent of users had taken out an additional loan in the preceding year to meet their obligations on time, the report said.<\/p>\n
Pay-later services can fall into something of a gray area because of the length and terms of their products. They don\u2019t carry the same dispute protections that consumers have come to expect from credit card providers, the Consumer Financial Protection Bureau has said, and getting refunds can be more complicated.<\/p>\n
And last year, the California Department of Financial Protection and Innovation temporarily halted the top players\u2019 main businesses and required them to refund nearly $2 million in fees after concluding that they had structured their products to evade regulation. To do business in the state, they must now be licensed lenders, which means considering consumers\u2019 ability to repay loans, rate and fee caps, and responding to consumer complaints.<\/p>\n
The services also require some self-regulation, users said.<\/p>\n
Kimberly Williams, an avid user of several services, said she would only recommend them to people who are financially fastidious.<\/p>\n
\u201cYou cannot use these types of plans and not be fully in sync with your finances, how the plans work and what you can afford,\u201d said Ms. Williams, 42, a health care research site manager.<\/p>\n
Ms. Williams previously worked as a wardrobe stylist and has a side business designing clothes that are manufactured in Lagos, Nigeria. She dedicates a portion of her monthly budget to clothing purchases that she often resells, which makes pay-later an attractive option.<\/p>\n
As she\u2019s used the services more, they\u2019ve increased her spending power \u2014 $10,000 at Affirm, up from $2,000 \u2014 and she\u2019s earned perks, like free shipping and the option of two additional weeks to make her first payment.<\/p>\n
\u201cThe rewards, the benefits, the increase of availability to spend \u2014 it comes at you quick,\u201d she said. \u201cIt becomes more and more tempting.\u201d<\/p>\n