Pay-by-installment options — like Afterpay, Quadpay, Affirm and Klarna — are popping up in more and more online stores, offering to help cover the cost of an online purchase by spreading out payments over time. Their rising popularity leaves retail brands wondering: what are the benefits of pay-by-installment financing and is it worth the investment? 

The increasing popularity of these financing options are largely thanks to millennials. Millennials have a combined spending power of $200B, but 60% don’t own a single credit card. This is the result of an overall shift in attitudes towards credit cards because of massive student debt (which 41% of millennials carry). Buy-now, pay-later options are a unique way for retail brands to appeal to younger shoppers who are less likely to have discretionary income at their disposal and are also used to flexibility in the way they shop.

The pay-by-installment market competitors offer subtly different services, with the most common being to split the payments into four, interest-free installments.

The true value of these financing options are shown in the numbers. Afterpay, the current leading competitor, stated that many retailers saw customer order sizes jump meaningfully, from 20% to 50%, after offering the service. Moreover, Afterpay has stated that installment payment plans lead to lower cart abandonment at the point of checkout, as the initial payment is just a quarter of the full price. 

That said, the risk of using these services are also apparent. Pay-by-installment financing makes it much easier to spend more money than you actually realize. In fact, 17% of Afterpay’s revenue comes from late payment fees charged to shoppers. Meanwhile, integrating these payment options can also be costly for retailers. A bulk of the financial companies’ incomes come from the service fees paid for by participating retailers, which range from 4%-6% of each transaction, as compared to only 1%-2% for credit cards. 

Currently, only 4% of activewear brands from Gartner L2’s Digital IQ Index: Activewear 2019 (Alo Yoga, Teva, and Sketchers) and 3% of fashion brands from Gartner L2’s Digital IQ Index: Fashion Global 2018 (Cole Haan and Acne Studios) have adopted alternative financing options. However, these brands are following in the footsteps of innovators like Reformation, Warby Parker, and BANDIER, who have been quicker to adopt. 

Undoubtedly, the traditional credit card market is being disrupted by buy now, pay later solutions that are rapidly picking up speed. However, the adoption of these payment plans is still in its early days. As their popularity grows, they will likely encounter regulatory obstacles or be forced to evolve and meet consumer needs. Only time will tell how much brands and retailers truly stand to gain from the addition of these alternative payment plans.

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