Buy now, pay later appeals to buyers who don’t like credit

A new iteration of an age-old retail concept — buy it now, pay for it later — is gaining traction with consumers, particularly younger ones, and a growing number of central Indiana retailers are adding the payment option to their e-commerce sites.

Financial technology companies such as Klarna, Afterpay and Affirm are partnering with retailers to offer customers a service known generically as buy now, pay later.

Details can vary, but in general, the concept functions a bit like a 0%-interest credit card or a switched-up version of layaway. Customers who qualify can choose to make retail purchases that are paid back in equal installments over time. In some cases, the customer pays no interest or fees if the purchases are repaid as scheduled.

Proponents say buy now, pay later offers consumers a way to avoid credit-card interest while also boosting retailers’ online sales. Opponents say it can lure customers into buying more than they can repay on time, leading to big bills and financial penalties.

The current version of the buy-now-pay-later model was first adopted in places like Europe and Australia — Klarna, founded in 2005, is a Swedish company; Afterpay, founded in 2015, is based in Australia.

But the trend has jumped to the United States. According to a recent report from S&P Global Market Intelligence’s 451 Research, 40.5% of U.S. merchants in mid-2020 said they already offered buy now, pay later, and another 43% were exploring the option.

"We expect a strong increase in merchants offering BNPL in the quarters ahead, given accelerated e-commerce growth and continued demand from younger consumers," the report says.

"I think it’s just going to become a relatively ubiquitous thing," agreed Kent Zimmerman, vice president of consumer technology and innovation at Evansville-based Shoe Carnival, which operates 377 stores in 35 states.

Shoe Carnival chose Klarna for its buy-now-pay-later option, which launched on the retailer’s website in January 2020 and allows customers to pay for purchases in four interest-free installments.

By the end of the year, Shoe Carnival expects to start testing Klarna as an option for in-store purchases as well. Zimmerman said the company hasn’t yet selected which stores or markets will participate in the pilot.

As of now, he said, the percentage of Shoe Carnival customers using Klarna online is in the low double digits. He declined to be specific, but said the percentage is in line with company expectations. "We’re super pleased with it."

Klarna users also spend more on average than do customers who use other forms of payment, Zimmerman said. He declined to share numbers but said the difference is "significant."

The retail giant Walmart, which has partnered with the buy-now-pay-later platform Affirm, began offering the payment option for online purchases in 2018. It has since rolled it out for in-store purchases.

"It’s an extremely important space to participate in," said Julia Unger, vice president of financial services at Walmart.

Buy-now-pay-later transactions make up 4% to 5% of U.S. e-commerce transactions, Unger said, and that percentage is expected to climb to 10% by 2025.

At Walmart, consumers who use Affirm can choose repayment over three, six or 12 monthly installments. Consumers do pay interest, with rates that vary depending on the length of repayment.

Appealing to youth

Younger consumers are driving the trend, Unger said. Compared with earlier generations, millennials are less interested in accruing debt. "They don’t view buy now, pay later as debt," she said. "They use it as a payment plan."

A recent report from The Strawhecker Group, an Omaha, Nebraska-based analytics and consulting firm, quantifies the trend.

In Strawhecker’s survey of 1,548 U.S. consumers early this year, 39% said they had tried at least one buy-now-pay-later service. Of those, 47% said they did so because they wanted to avoid paying interest on credit cards. And 46% said they wanted to buy something that otherwise would not fit into their budget.

Buy-now-pay-later usage accelerated in the U.S. all last year and saw a huge bump over the 2020 holiday season, said Strawhecker Research Analyst Sheridan Trent.

According to the Strawhecker report, for instance, more than 60,000 new U.S. users downloaded the Klarna app every day in December.

Trent said buy-now-pay-later adoption probably accelerated because of the pandemic’s economic disruptions. Someone who might have been concerned about losing his or her job, she said, might have seen buy now, pay later as a budgeting tool in an uncertain time. "A lot of people were concerned and trying to figure out ways to save money."

And once consumers try a buy-now-pay-later service, Trent said, research shows they’re likely to use it repeatedly. "We expect to see usage increase with these services."

Smaller retailers are also jumping on board.

Blue Peppermint Boutique, which has a brick-and-mortar store in Fishers and also sells online, began offering buy now, pay later for online purchases a little more than a year ago. The women’s clothing retailer uses Afterpay.

"The biggest draw for me is just that much larger companies than me are offering it, and I always want to appear bigger than just a local mom-and-pop," said Blue Peppermint owner Jessica Landez. "If the bigger companies that have access to a lot more data than I am are doing it, it’s probably good for us, too."

Blue Peppermint pays Afterpay a flat fee per transaction, plus a percentage of each transaction.

"It’s basically like a line of credit that you pay back in four installments, and we absorb all the costs. It really is an appealing thing to the customers," Landez said.

Afterpay customers spend an average of $90 per transaction, she said, which is higher than the average for other payment forms.

Currently, 10% or less of Blue Peppermint’s online customers use Afterpay. Landez predicted that will grow as more people become familiar with the buy-now-pay-later concept. "I don’t see any reason why it would slow down."

Not for everyone

Trent, the Strawhecker analyst, said buy-now-pay-later providers make their money in a variety of ways — fees from retailers, but also late fees and interest payments from customers who fail to repay on time.

Consumers might run into other problems if they don’t make payments on time.

"It’s like anything — if it isn’t used responsibly, it can definitely lead to credit-score issues," Trent said.

And the S&P report points out that buy now, pay later is not held to the same regulatory standards as traditional credit cards are because the newer payment option doesn’t meet the legal definition of credit. But Australia has already established regulations around the practice, and it "may face tighter controls in the U.S. down the road," the report says.

For these reasons and more, some local retailers say they’re not sold on the concept.

United State of Indiana, which makes and sells Indiana-themed T-shirts and other items that are mostly priced around $25, does not offer a buy-now-pay-later option on its website. The company, founded in 2010, did its printing at the former Central State Hospital campus on Indianapolis’ west side before moving to West Terre Haute last year.

Co-owner Graham Brown said paying over time doesn’t make sense for the small-ticket items his company sells. He’s also not eager to sign on for the buy-now-pay-later provider fees his company might have to pay.

"For a $25 to $50 sale, it seems like something that no one even asked for," Brown said.

United State of Indiana sells directly to consumers through its website and through pop-up retail events. The company also has some wholesale customers and does screenprinting for business customers.

Brown said a buy-now-pay-later option might make United State of Indiana’s website feel more impersonal, which would hurt the small-business feeling the company strives to convey.

He also said, though, that the retailer might change its stance over time. "If it becomes an internet standard, I’m sure we will adopt it."

Moonshot Games, a locally owned game and puzzle retailer with stores in Noblesville and on Mass Ave., has also chosen not to offer buy-now-pay-later options.

Moonshot’s co-owner, Jayson Manship, said a lot of the store’s customers are in their early 20s, and he fears a buy-now-pay-later option might tempt some to spend more than they can afford. "We don’t want to create situations that might create personal credit issues or whatever else in the future."

Manship speaks from experience. When he got his first credit card in his 20s, he overspent and racked up big bills. "It took me years to get out of that."

That said, Manship said he believes the buy-now-pay-later concept might be here to stay.

"It definitely feels like something that has the potential to be real," he said. "We don’t intend to do it, but I can understand why some people do."