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Why Everyone Wants a Piece of ‘Buy Now, Pay Later’

The COVID-19 pandemic has been described as an accelerator of digital trends that were already set in motion, and one technology sector has experienced this to a tee—fueled by the combination of a shift to online buying and overall restrained spending behaviors when times are tight.

The installment payments industry is shaking out to be a very competitive one amid the pandemic, with startups and traditional players alike propping up their own solutions to enable consumers to “buy now, pay later” on their terms.

Names like Klarna, Affirm, Afterpay, Sezzle, QuadPay and Splitit are among many companies that have gained millions of new users and churned out new partnerships in recent months, while PayPal recently introduced a “Pay in 4” installments option to extend its own growing suite of pay-later solutions. Even payments giants like Visa and Mastercard have entered with fray, with the former kicking off its installment pilot in July and the latter acquiring alternative financing platform last year Vyze in April.

More than one in three consumers aged 18-37 say the availability of an installment payment option has influenced their decision to complete a purchase, according to 451 Research’s Q2 2020 Voice of the Connected User Landscape survey.

Consumers that use these alternative spending platforms have many reasons to do so, with 39.4 percent saying they want to avoid paying credit card interest, according to a July survey from The Ascent. Many of the buzzier new platforms, including Klarna, AfterPay and the new PayPal offering, tout zero percent interest rates, with shoppers instead incurring a late fee when applicable.

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Another 38.4 percent of consumers said they want to make purchases that otherwise would not fit in their budget, while 24.7 percent say they want to borrow money without a credit check. And finally, 16.3 percent simply just don’t like using credit cards.

The events of 2020 have created an ideal breeding ground for installment payments market to explode.

“Between unemployment numbers, economic uncertainty surrounding if/when things will ever get back to ‘normal,’ and the fact that more of us have more time not being at work than we likely have in years—you’ve got a perfect storm brewing,” said Steven Rowen, managing partner at Retail Systems Research (RSR). “People are scared about their futures and how they are going to pay their bills, but at the same time, 1) a large portion of the population still needs to buy the things required to survive, despite the fact that money is beyond tight and 2) a slightly luckier segment of the population is using the process of researching and buying new items to help combat boredom. The ability to justify those purchases—in both cases—is a lot easier when installments are an option.”

Retailers are noticing and responding to this increasing demand. Another second-quarter survey from 451 Research revealed that 40 percent of merchants with more than half of sales occurring online now offer installment payments at checkout, and another 43 percent are either in the discovery, planning or consideration phase with the technology.

“We just finished a research piece where we evaluated the online shopping experience 80 mid-size retailers are offering. Some of the highest-scoring retailers earned big points for getting creative with checkout and payment options,” Rowen said. “Afterpay, for example, is making huge inroads in the apparel market. Clever companies are quickly going to realize that the more flexible checkout and payment options they can provide—the better their chance of weathering the storm.”

With so many companies still trying to figure out the space, there’s still time to try to stake a claim for market share. There’s also the potential for consolidation down the line “almost immediately,” given the surplus of players, according to Rowen.

This year has already seen Australia’s Zip Co acquire QuadPay—although it continues to operate the two as separate businesses—and Afterpay buy out not one, but two smaller installment players in Spain’s Pagantis and Indonesia’s Empatkali as it attempts to gain greater traction in Europe and Southeast Asia.

Mastercard has most recently built on its Vyze acquisition by partnering with payments company TSYS. With the partnership, Mastercard is trying to be a little more experimental in its installments endeavors, enable consumers to use their card to split transactions into installments before, during or after checkout.

“Adding the installment lending function to a bank card is suitable for all parties in the transaction,” said Brian Riley, director of the credit practice at Mercator Advisory Group. “The consumer has a discrete transaction, separate from their general purchasing. Merchants get to close the sale, and similar to credit card usage, have an opportunity to upsell the customer. The issuing bank benefits with increased spending.”

Three out of four U.S. shoppers who have tried installment plans for the first time during the pandemic plan to continue using them after it is over, according to research Mastercard conducted in July.

Prior to checkout, consumers using Mastercard can pre-determine to spread payments over time for specified dollar thresholds and spend categories, such as home improvement purchases over $500, or can arrange automatic installments for chosen retailers.

Consumers can choose to get notifications while shopping, enabling them to purchase goods on an installment plan integrated with their card. Mastercard’s near-real-time capabilities are designed to allow cardholders to move their purchase to an installment plan moments after the purchase is complete without the lift of merchant integration.

Shoppers also have the option to choose an installment plan presented by their issuing bank after a purchase is complete, enabled using the TSYS Digital Engagement Platform.

Due to Mastercard’s expanded roster of lending partners, including Fly Now Pay Later and Quadpay, the company can connect merchants with multiple lenders at a time. The credit card company now partners with buy now, pay later companies including Splitit, Jifiti, Divido and Pine Labs to serve numerous markets across the global, including Europe and Asia Pacific.

Klarna reels in Gymshark

While Mastercard expands its installments capabilities, Klarna continues to fortify its array of retail partners.

Europe’s largest fintech company with an estimated $5.5 billion valuation, Klarna said it has added another 1 million consumers in the past three months and picked up yet another top-name retailer in partnering with Gymshark. Already a partner of marquee apparel and footwear brands including H&M, Asos and Finish Line, Klarna now enables shoppers to use its platform within Gymshark.com and pay in four equal, interest-free installments.

Gymshark raised a $300 million private equity investment from General Atlantic that valued the brand at approximately $1.45 billion, making it one of Klarna’s most valuable partners yet. The company is in the sweet spot of the athleisure category that has been tremendously successful during the pandemic, seeing a rise in sales of their home workout product offering across both their apparel and accessories ranges. The brand also has continued to launch new styles throughout the period, including the recent Power & Vital Rise collections.

Data from Klarna revealed an increase in spend within the athleisure category across demographics as stay-at-home policies took effect during the pandemic. Gen Z shoppers increased their category spending by 28 percent in the March-to-May period versus January to February, according to Klarna’s average week-over-week transaction volume data.

Overall, Klarna and the rest of the installments platforms can aid shoppers concerned about credit and other financial anxieties, but usage doesn’t appear to be that frequent yet, even as adoption has increased.

Among those who use an installment payments platform, 27.7 percent use it once a year or less, 21.1 percent use it every six months, 21.3 percent use it every three months and 18.3 percent use it every month. Just over 11 percent use buy now, pay later platforms on a weekly or more frequent basis, according to the Ascent survey.