How do “buy now pay later” services work?
The payments company Square is planning to buy Afterpay, an Australian fintech firm that allows people to pay for items in installments. The price: $29 billion in stock.
Afterpay is one of many companies known as “buy now pay later” services. Others include Affirm, PayPal Credit (formerly Bill Me Later) and Klarna.
That phrase: “Buy now, pay later.” Sounds familiar, right?
“Well, technically, if you want to get into it, I mean paying with a credit card is buying now, paying later,” said Sheridan Trent, at the Strawhecker Group, a payments consulting firm.
A few ways these operations are different: With buy now, pay later services, Trent said, when you make a purchase on a retailer’s website or through an app, you agree upfront to pay in a certain number of installments. There’s pay in four, “some of them will do, like, pay in three, some of them pay in six.”
Another big difference compared to credit cards: “Many of these come without interest, as long as you pay it back in time,” Trent said.
And often, buy now, pay later companies do not run credit checks.
Colleen McCreary is a financial advocate at Credit Karma, which has surveyed people who use these services.
“For a number of people from our surveys, what we’ve seen is that for folks, it doesn’t feel like debt,” McCreary said.
Of course, it is debt. Credit Karma also found that 38% of people who used buy now, pay later services had missed a payment.
“And, of that group, 72% said that they did see their credit score decrease slightly,” McCreary said.
Customers who miss a payment also owe fees and sometimes interest, which is one way buy now, pay later companies make money. The other is by charging retailers.
Retailers have to pay to give their customers the option of using these services, said Marie-Claude Nadeau, at McKinsey.
“And they’ll, you know, make that decision if they think those customers will spend more with them if they can spread their payment over six weeks,” she said.
Or six months, or whatever. Retailers see this as enough of a draw that they’re often willing to pay higher fees than they do to accept credit cards.
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