Amazon does. Walmart too. Why Retail Likes to ‘Buy Now, Pay Later’
Installment plans are back in fashion. PayPal Holdings Inc. announced last week that it was buying Japanese installment payment startup Paidy Inc., following Square Inc.’s $ 29 billion deal for Afterpay Ltd. Macy’s Inc. and Bed Bath & Beyond Inc. have added the option at checkout in the past year. Even Amazon.com Inc. does.
One reason: buyers like Ms. Luedtke who don’t qualify for credit cards. Businesses that buy now and pay later say they rely less on traditional credit scores and reports and in some cases bypass them altogether. This allows them to approve more consumers. Buyers have the ability to buy things even without cash, which translates into higher sales for retailers.
Afterpay said it expects the company’s U.S. merchants to see sales increase by $ 8.2 billion this year due to the payment plans. Affirm Holdings Inc. said last year that purchases made with its payment plans were on average 85% greater.
Buyers spend more at Macy’s when they use installment plans offered by Klarna Bank AB, said Jeff Gennette, CEO of Macy’s, in a recent earnings call. Klarna is also helping the retailer attract younger customers, he said.
“The value most retailers see in buying now, paying later is customer acquisition,” said David Sykes, Klarna director for North America.
Ms. Luedtke, 26, now has credit cards but still prefers installment plans. Last month, she used them to buy about $ 40 worth of Peter Thomas Roth skin care products and $ 65 worth of clothes from Shein.
“It definitely influences how much I buy or spend more,” she said. “It’s easier to pay $ 200 over that many weeks compared to $ 200 now.”
Buying now, paying later is a new take on an old idea. Major retailers have been offering installment plans for big-ticket items like washing machines for decades. Today, these plans come in a variety of flavors. Afterpay offers payment plans that buyers typically attach to their debit cards. Others, like Affirm, also facilitate new loans.
Interest rates and other terms vary depending on the payment plan provider. Affirm’s interest rates range from 0% to 30%, with some 43% of its transactions in its last fiscal year interest-free. The company does not charge late fees. Afterpay does not charge interest but collects late fees.
Merchants take no credit risk with these plans, but the fees they incur can be higher than on credit card purchases, often between 3% and 5% of the purchase price, according to people close to the market. case.
Companies that buy now and pay later say they can approve more customers than banks, including people with little or no borrowing history. In the United States, some 53 million adults do not have a traditional credit score, according to the creator of the FICO score, Fair Isaac Corp. Installment plans are more secure, they say, because they’re often below credit card spending limits and approved per transaction.
Affirm said it had a net write-off rate of 1% in the quarter ended June 30, down from 2% a year earlier. Afterpay said it wrote off 0.6% of the total dollars it processed in payments during the company’s fiscal year ended June 30, up from 0.4% the year before.
By working with a network of retailers, Buy It Now businesses can create self-sustaining payment ecosystems. They take payment behavior into account in future subscription decisions. Customers who pay late or not at all risk losing the deposit option at other participating retailers.
“Most traders want a partner who has a real advantage and real underwriting capacity,” said Max Levchin, CEO of Affirm. “These are not more in-depth approvals, but they are different approvals.”
Amazon and Walmart Inc. both work with Affirm. Both said they wanted their financial partners to extend credit to more of their customers.
Amazon is reviewing the proposals as it assesses whether to replace its long-standing card issuer JPMorgan Chase & Co. Amazon is looking for “commitments to underwrite competitively to expand the acquisition funnel,” the retailer said in a request for proposals reviewed by The Wall Street. Newspaper.
The desire to increase loan approvals was one of the reasons Walmart decided in 2018 to end its decades-long credit card partnership with Synchrony Financial. (Capital One Financial Corp. now issues Walmart-branded credit cards.) The following year, the retailer offered Affirm loans to most of its customers.
“Our goal is financial inclusion for all,” said Julia Unger, vice president of financial services at Walmart.
Some banks now offer payment options on their credit cards. Citigroup Inc. saw the dollar amount of credit card purchases converted to installment loans in July, compared to the same month a year earlier, said Gonzalo Luchetti, director of Citigroup’s U.S. consumer banking.
Synchrony, America’s largest in-store credit card issuer, will launch a buy it now and payout plan later in October. Capital One will test its own offering later this year, CEO Richard Fairbank said at a conference on Monday.
Wells Fargo & Co. and Bank of America Corp. are considering adding installment plans to their credit cards, according to people familiar with the matter. Visa Inc. said it has tested ways for buyers to verify if they are eligible for installment plans when they enter their card numbers at checkout.
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