Younger generations of consumers are shifting away from the spending habits of their parents, choosing to live within rather than beyond their means. In response to this desire for financial control, numerous buy now, pay later platforms have been popping up to help shoppers make purchases without overextending.
Millennials in particular came of age during the financial crisis of 2008. And that affected their relationship to money.
In an effort to weed out predatory lending, the U.S. Congress passed the Credit Card Accountability Responsibility and Disclosure Act in 2009, which included provisions to specifically protect young people. Credit card companies could not issue credit to consumers under the age of 21 unless they had a cosigner, and there were limits placed on how issuers could market to college students.
Between watching the impact of debt during the recession and having less exposure to credit cards from a young age, about two-thirds of consumers in this cohort still do not have a credit card. And those who do prefer not to carry a balance.
“What we’re hearing from consumers is…they just want to be more responsible with their money,” said Brad Paterson, CEO of Splitit. “They want more control. And if you’re spending beyond your means, you lose control of your finances to some degree and you hand that over to someone else.”
These changing attitudes are fueling a demand for alternative payment methods. A number of these pay-later platforms, including Affirm, Sezzle and Splitit, are scheduled to exhibit their solutions at the Shoptalk retail conference this September.
The idea of paying in installments has been around for a long time, whether through layaways or infomercial hosts touting “five easy payments.” But installment platforms are bringing the concept to the next generation. While pay later is highly popular in markets such as Australia and Latin America, the U.S. has been later to the trend—but it is catching up.
Indicative of the movement and demand for these options, traditional creditors have begun offering their own pay-later solutions, such as Citi’s Flex Loan and Plan It from American Express.
Many pay-later platforms are positioning themselves as a safer, simpler and more transparent option when compared to traditional credit models, which count on consumers accruing interest and late fees to make money.
“The majority of consumers say they are optimistic about their financial futures, however gimmicks like fine print have put those futures in jeopardy,” said Greg Fisher, chief marketing officer at Affirm.
“For example, nearly 40 percent of consumers don’t know the interest rates on their credit cards because the average agreement is 5,000 words long; This makes it easy to get into a debt spiral,” he added. “However, products like Affirm, which are built to fundamentally align with the best interest of consumers, have restored this optimism and facilitated healthier financial habits.”
Sezzle, which thinks of itself as an “entry point” to credit, offers a set interest-free plan that features four payments over six weeks. As a protection against overspending, consumers who miss a payment are barred from using Sezzle with another merchant until they take care of their balance owed. While also catering to those without credit, Affirm offers both short- and long-term installments that are personalized to the customer, ranging from three to 12 months.
Whereas many of its peers offer an alternative for credit and are underwriting customers, Splitit instead focuses on helping consumers spread out payments on an existing credit card between three to 36 months. Due to the credit-holding customer base it is targeting, Splitit’s average order value for fashion purchases is $1,500 and can vary from about $500 to $5,000. In comparison, Sezzle’s fashion sweet spot is $50 to $1,000 purchases, allowing it to target a shopper making more frequent purchases.
For retailers, the biggest impact of offering installments is an uplift in both conversions and average order value. According to Sezzle co-founder and chief revenue officer Paul Paradis, affordable retailers such as fast-fashion brands tend to see more of an uptick in cart size as consumers add more items, whereas companies selling higher-priced goods are more apt to see a greater rise in conversions as consumers are more confident about the affordability of their purchase.
Return rates also go down courtesy of more easily digestible payments.
With loyal user bases, these payment providers are also leveraging their relationships and sending traffic toward their retail partners through their apps or social media channels. While pay-later platforms have an audience across generations, they are particularly popular among the valuable, digitally driven millennial audience that holds about $200 billion in spending power in the U.S. alone, according to McKinsey.
Also helping additional payment methods take off is the proliferation of standardized e-commerce platforms such as Shopify and Magento. Affirm, Sezzle and Splitit all support the major platforms, simplifying the process of installing their solutions for most retailers. For those with custom e-commerce platforms, the companies offer software development kits for their technology teams.
With so much competition in the space, payment players believe it won’t be a winner-takes-all situation. But due to the sheer number of companies targeting customers without existing credit, Splitit’s Paterson expects there to be some consolidation among those types of solutions. Paradis from Sezzle pointed out that just as there are different players in credit, such as Visa, Mastercard and American Express, merchants will likely make multiple installment options available to their customers so that they can choose their preferred payment method.
Payment platforms are also positioned to supplement rather than completely supplant credit cards, which are still a prime option for pricey purchases.
While multiple formats of pay later can coexist, the differentiating factors for these solutions will be customer centricity and transparency. Gaining a loyal, trusting customer base also makes these payment providers more valuable to retail partners.
“I think the [platforms] that are going to win out are the ones that are upfront and completely open and transparent about how they make money and build that trust with the consumer,” Paradis said. “In the end, that’s the solution the retailer will select, because any experience they have with our payment solution is a reflection on their store, and if they’re offering something that’s deemed predatory or hard to understand or unclear, it’s going to look bad on them.”