Installment plans have helped shoppers afford large purchases since the late 19th century and are still available for pricey items like cars and smartphones. But to delay payment for a T-shirt and a couple pairs of jeans, you needed a credit card. Now several fintech startups are putting smaller purchases on installment, too.
This year, Australia’s Afterpay began offering installment plans in the U.S., joining Affirm, a San Francisco startup launched by PayPal co-founder Max Levchin. Square announced its own installments plan in October; so did Swedish payments company Klarna, which has teamed up with H&M to offer services in 14 markets it didn’t name.
Affirm and Afterpay say they’re targeting millennial shoppers by filling a gap between credit cards and store credit, which require lots of paperwork and a strong credit rating. Perhaps mindful of the new competition, established players such as Discover warn that these upstarts could run into trouble should the economy sour and defaults spike.
Consumers apply online or via app and learn whether they’ve been approved in seconds. They click a button at checkout on the websites of participating retailers if they want to pay by installment. Cotton On, which sells inexpensive apparel, began offering U.S. installments through Afterpay in August. E-commerce chief Brendan Sweeney says 20 percent of buyers are already using the feature, which breaks up bills into four equal parts spread over six weeks and charges no interest.
“I was kind of skeptical that there would be a market for people interested in installments, but there clearly is,” he says. “We’ve seen a remarkable uptake from millennial customers.”
Sweeney says shoppers spend $50 on average per order.
Afterpay Touch Group caught on quickly with Australian millennials. Founder Nick Molnar understood intuitively that his contemporaries would approach credit differently from their forebears.
The company charges no interest, instead collecting a fee of as much as 6 percent of a sale from the retailer. Afterpay works with 20,000 merchants globally — including 1,000 now online in the U.S. where the company has signed up Urban Outfitters, Anthropologie and Free People. Based on its recent monthly performance, Afterpay says it has a global sales run rate of more than $3 billion a year.
Afterpay is betting American millennials will be keen on its service . The company says 65 percent of the U.S. cohort don’t have a credit card, are 30 on average and are intrigued by using installments to pay for merchandise.
Consumer watchdogs are paying attention.
“These services were created to facilitate impulse shopping that, for many, jeopardize their ability to afford necessary expenditures and to build needed savings,” says Steve Brobeck, senior fellow at Consumer Federation of America.