Buy now, pay later plans take a bite out of credit card purchases

A lot of people who bought home exercise equipment this year switched to a different

A lot of people who bought home exercise equipment this year switched to a different kind of consumer credit that allowed them to make the purchase on installment plans rather than with credit cards.

They made the transactions using a service called buy now, pay later, which is highly popular overseas and gaining traction in the U.S.

One of the biggest players in the industry, San Francisco-based Affirm, said Peloton Interactive Inc., the maker of high-end home fitness machines, accounted for 30% of its 2020 revenues.

“People are looking for affordable financing with a predictable payback cycle. Buy now, pay later offers that, and it’s also well-suited for the online shopping craze brought on by the pandemic,” said Ted Rossman, an industry analyst at

It’s a way to make major purchases and pay it off in a set number of equal payments — such as four payments over six weeks. Some of the companies serving this market charge a fixed fee instead of interest. Some keep interest rates to a minimum. Some don’t charge a fee whatsoever. An updated layaway plan.

Buy now, pay later companies have been around and gaining traction for some time, but hit triple digit growth this holiday season, Rossman said.

“I’d characterize it as wider adoption than something truly new,” he said.

Worldpay, a U.K.-based company that provides payment technology to merchants and businesses, estimates that 20% of consumers in Germany and Australia are using buy now, pay later services, but this way of paying for merchandise accounts for only 1% of e-commerce payments in the U.S.

While there were some new services that debuted in 2020 — like PayPal’s Pay in 4 — most of the players have been around for a while. Even PayPal had a different buy now, pay later solution called PayPal Credit, which continues to exist.

The market leaders include Klarna, founded in 2005; Affirm, which was founded in 2012; and Afterpay, which came on the scene in 2014.

But this year many of these services experienced explosive growth as more people began taking advantage of a financing option that allows them to eliminate paying interest.

Klarna recently announced its 11 millionth U.S. customer just three weeks after hitting 10 million. It more than doubled its U.S. customer base year-over-year. Afterpay processed $2 billion in global sales in November, up 112% from November 2019. Affirm also roughly doubled its revenue over the past year.

Paying down debt

Buy now, pay later can be seen as a hybrid of debit meets credit.

Consumers can potentially get several weeks, months or even years with a 0% interest rate, which makes it the same as a debit card that gets paid over time.

More people backed away from credit card spending this year. Credit card debt is down 11% since February, according to the Federal Reserve Bank. That’s partly due to a mix of government stimulus, less overall spending and households making debt payoff a priority.

“Open-ended credit scares a lot of people,” Rossman said. “The average credit card charges 16%, and if you only make the minimum payments, your debt can stretch on for years.”

The majority of people who bought items on an installment plan have access to credit cards. According to payment processing company Cornerstone Advisors, 97% of buy now, pay later users have a credit card; and 7 in 10 of them earn more than $75,000.

But buy now, pay later feels more responsible to many people, Rossman said.

“Many people gravitate to buy now, pay later because they can see the light at the end of the tunnel,” Rossman said. “They like knowing if they make these four fixed payments that they’ll be debt-free in six weeks.”

Or maybe that’s 12 weeks. The terms can vary. Affirm will finance the purchase of Peloton equipment over 39 monthly payments. That can make the purchase of a $2,000 fitness bike much more affordable.

A financing company like Affirm is able to make money on its 0% APR installment option by taking a cut of the sale from the merchant. Merchants are willing to pay Affirm to assume the credit risk and facilitate faster product sales. On some loans Affirm also collects fixed interest payments from the consumer.

Lenders see competition

Although credit cards are the main source of consumer credit purchases, the card industry is taking note of buy now, pay later as a competitive threat.

American Express launched Pay It Plan It in 2017 as its answer to buy now, pay later by letting card members designate certain purchases for installment plans at lower interest rates. More recently, Citi Flex Pay and My Chase Plan entered the scene.

“Banks definitely see how much buy now, pay later is resonating with customers and they are adapting their offerings to capture a piece of that pie,” Rossman said.

The holiday season gave some consumers a chance to try a different form of credit.

New data from shows 3.7% of Black Friday online shoppers used flexible payment offers for their purchases; and 71% of the time they bought clothing, followed by sporting goods, home furnishings, toys, electronics and health and personal care items.

Rossman said he is surprised by how many higher income consumers with other credit alternatives are gravitating to the services.

“It’s not just the conventional wisdom of young people with no credit and no money,” he said. “Some people buy Peloton bikes worth thousands on Affirm to get years of 0% financing. There’s definitely a use-case there, I just think for most people, they’d be better off using a credit card.

“As long as they pay in full, they’ll avoid debt, earn rewards and access better buyer protections,” he said. “And if they can’t pay in full, maybe it’s not the right time for that type of purchase.”

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