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Why Millennials Are Paying in Installments for Their Fashion Finds

Afterpay CEO Nick Molnar “always had that hustle.”

From importing headphones from Japan at 16, to launching an eBay business hawking jewelry and mulling a career as an investment banker, it was clear the Sydney native had been bitten by the entrepreneurial bug.

And with that experience, the budding entrepreneur was successfully recruited by a neighbor who runs “one of the largest investment funds” in the country, but after sharing the seed of an idea for what would become Afterpay, which allows consumers to pay for their purchases in smaller installments, the 28-year-old said the finance guru pushed him to pursue the opportunity—and would even hold his job for a year in case it didn’t work out.

“So he gave me the comfort to go and do it,” Molnar explained, “and then I never looked back.”

That kernel of a thought is now a $1.5-billion business four years post-launch.

A different way of consuming

When it comes to millennials, it takes one to know one. For Molnar, just observing how his friends operate opened his eyes to an untapped opportunity. “They go out for dinner and all have debit cards,” he noted. “It’s a different way of consuming.”

Unlike previous generations and their love of credit, millennials have “this preference toward spending their own money,” Molnar explained, “largely driven by how much student debt they have outstanding and the 2008 [financial] crisis.” It’s a perfect storm driving the 18- to 37-year-old demographic away from the heavy reliance of credit cards—and the attendant debt—that’s crippling many Gen X and older households.

Molnar said speaking to the investment community about Afterpay elucidates the yawning chasm in financial ideology that separates the old guard from a generation on the upswing. Investment bankers he encounters tend to be older and of the mindset that “I just use my credit card for the points,” the Afterpay co-founder explained. “The average millennial has never spent enough money for the points to be marginally relevant. It’s this thing that’s valued that they never [benefitted] from.”

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According to a 2018 survey, 44 percent of millennial consumers have never used a credit card. It’s that aversion to credit and debt that compelled Molnar to look at ways to provide non-traditional payment solutions for use in the retail industry.

Just say “no” to credit

On its face, Afterpay—which merged with payment processing firm Touchcorp and launched in Australia before arriving in the U.S. just months ago—is simple. Molnar is careful to stress that it’s not a finance product; there’s no credit check, no APR, no burdensome, escalating fees. Instead, consumers using Afterpay pay for their purchases over four payments; one payment immediately, with the remaining balance debited in equal installments at two week intervals. “I think [millennials are] used to reoccurring debit cycles now and subscriptions, so they just want simplicity,” Molnar noted.

Eighty-five percent of Afterpay customers, regardless of age group, uses debit cards for their purchases, he added, and U.S. debit card transactions outpace those made with credit cards by a factor of two.

The Afterpay service bears some similarities to layaway but sort of in reverse, as customers get their items right away instead of waiting for all the payments to be made. Plus, Molnar added, most retailers hate layaway plans because many need warehouses just to store all of the put-up products. And for consumers, the experience is no better. One person being interviewed on a TV news program described layaway as akin to “visiting your clothes in jail,” he said.

For retailers, Afterpay can be attractive because the firm assumes all of the risk. Merchants pay a fee to integrate with Afterpay but don’t have to deal with the hassle and complexity of financing. What’s more, Afterpay serves as an effective customer acquisition vehicle—with 90 percent of monthly transactions stemming from repeat customers—and drives desirable customer behaviors, from higher average order value (AOV) to a greater share of full-priced purchases with more favorable margins.

That’s because there’s a fair bit of psychology at play here, Molnar said. Most retailers add the Afterpay logo and details on each product page, which can encourage a shopper to take the plunge. The dress might cost $70—but the first payment of $17.50 looks very affordable and appealing, Molar explained. “This is a perceived discount,” he said. “Customers feel like they’re getting a great deal and retailers maximize margins.”

What’s more, Afterpay can influence shoppers to make incremental purchases. She’ll thrown in a pair of shoes to coordinate with the dress, for example, because she’s not bearing the full brunt of the purchase price right away. Molnar said that some retailers will cross-sell, creating sets of items—say, a coordinating top and bottom—and leverage Afterpay to encourage the multi-product purchase. Others will showcase Afterpay on the checkout page, making shoppers aware that it’s an option. Still other retailers have profiled Afterpay in shopping cart abandonment emails to lure customers back to complete a purchase.

Afterpay and the AOV

Urban Outfitters, Afterpay’s first of more than 50 U.S. retail customers including Revolve, quickly saw a 30 percent lift in average order value (AOV) following its May launch. Parent company Urban Outfitters Inc. has also rolled out the service across its other brands, including Anthropologie and Free People, with chief digital officer David Hayne stating that “preliminary tests in the U.S. have shown promise.” The enterprise distributes Free People merchandise through Australia’s The Iconic department store and had already seen firsthand how useful Afterpay could be. The U.S. market represents a lucrative opportunity for Afterpay, as fashion e-commerce here is four times larger than all of online retail in Australia.

Afterpay’s AOV hovers around $200. “We’re not about a considered purchase,” Molnar explained, describing the company’s bread and butter as the fashion and beauty verticals, though home décor are also big. “We’re about life’s little luxuries—everyday transactions.”

In the event that a customer fails to make a payment on time, Afterpay levies an $8 late fee, using that “as leverage to get paid,” Molnar explained. Shoppers also get locked out of the Afterpay system until they’ve squared their obligations. Routine offenders will lose their Afterpay privileges altogether.

“If you betray our trust we don’t want you on the system anymore,” Molnar explained. “You can’t get into any debt cycles or debt traps because of low average order value. If you have a couple orders outstanding at once, you can’t use the system again. You can’t keep accumulating and making the problem worse.”

With 1.8 million customers and more than 14,000 retailers signed up in its native country, Afterpay is “in a great position to…help U.S. brands launch into Australia,” Molnar noted.

Of Afterpay’s 250 employees, roughly 100 are focused on R&D. The company has achieved its rapid success by assembling a world-class team of talent poached from top tech and fashion firms. Chief technology officer and VP of product Akash Garg was formerly Uber’s director of engineering and senior director of engineering at Twitter. Afterpay hired global chief risk and analytics officer Xin Ge away from Uber, too, where he served as head of risk and previously was “integral” in developing PayPal’s risk infrastructure. Melissa Davis, who built ShopStyle for nearly a decade before selling it to Japanese e-commerce giant Rakuten, runs sales and marketing as chief revenue officer.

Afterpay in real life

The in-store opportunity is the other piece of the puzzle for Afterpay. Customers can use the service in brick-and-mortar shops by displaying a barcode on their smartphones at the point of sale, Molnar noted. Given Afterpay’s focus on the millennial market, it’s little surprise that 70 percent of its transactions are conducted via mobile.

Molnar foresees greater integration of physical and digital retail going forward.

“The coming together of online and offline has been talked about a lot but I think it’s going to come into an interesting position in the next 12 months,” he said. “How [retailers] bring digital into stores is going to be really interesting.”