“Buy now, pay later” is growing in online retail, but not without risk – CBS Pittsburgh


(CNN) – If you’ve recently purchased furniture, clothing, or electronics online, you’ve likely seen a new option that lets you defer paying for one item at a time.

Retailers from Nordstrom to Sephora allow their customers to pay for items as cheap as a tube of lipstick in installments, following a concept known as “buy now, pay later”. Buyers provide details like name, billing address, date of birth, email address, and contact number, and some websites require them to quickly go through a “gentle” credit check to be approved. Then they can complete the order but pay over the course of weeks or months. (Buyers are automatically charged for each installment on their credit or debit card.)

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Stores are banking on buy now, pay later to reach younger consumers and keep up with the rapid shift to online shopping in the pandemic. This week Macy’s announced that it would invest in Klarna, one of the companies behind the concept, and offer four equal, interest-free installments at the online checkout.

Such payment options are gaining in importance. Klarna and its competitors Affirm and Afterpay have all gained new customers and dealers in the past few months. In August, PayPal jumped into the game with “Pay in 4”, an installment payment option for purchases between 30 and 600 US dollars over a period of six weeks.

These services typically make money with merchants paying fees for purchases and customer late fees when they miss a payment. If the customer does not pay, the bag stays with service, not with the retailer.

That doesn’t mean there aren’t any downsides for buyers. If consumers do not pay on time, they can be charged default interest and have to pay interest on the balance. Experts also say the option to pay later may create poor incentives for buyers as they may be more inclined to spend more than they can afford.

“If you can’t afford to buy a small ticket item with cash or a regular credit card, should you even make the purchase?” Said Bruce McClary, representative for the National Foundation for Credit Counseling, a nonprofit. Customers “may want to consider continuing to work” [their] Budget challenges before adding another debt to the list. “

An up and coming trend

The “buy now, pay later” model was an emerging trend for consumers prior to the pandemic, especially among Millennials and Generation Z, who payment analysts say are wary of taking on credit card debt. According to Afterpay, around 90% of customers use debit cards to pay for purchases.

Deferred payments are “now more attractive than ever,” said AJ Stocker, vice president of strategic consulting at Kobie Marketing, a company that advises brands on customer loyalty. “We are now seeing an acceleration that has been influenced by changing consumer needs as a result of the pandemic.”

Several factors have converged during the pandemic to make buying now more attractive and paying later, experts say.

Consumers shop more online when they stay at home. Most of the leading buy now, pay later providers have payment options embedded on their retailers’ websites that make it easy for customers to select “defer payments” when checking out.

At the same time, more and more shoppers are tied to cash due to the poor economic conditions caused by the pandemic. This has made the decision to split the payment for an expensive item more attractive.

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Banks are also restricting available credit as the economic impact of the coronavirus outbreak has made consumers’ ability to make payments reliably, increasingly unpredictable.

This has widened the circle of people interested in alternative ways to finance their purchases, experts say.

“Buy now, pay later is a good way to get out of the temporary financial turmoil many may experience these days,” said Manel Baucells, associate professor of business administration at the University of Virginia’s Darden School of Business.

The option is also attractive for dealers to offer it now.

PayPal Vice President of Global Pay later Greg Lisiewski said in an interview that PayPal wanted to bring its new option to consumers and retailers before the busy holiday season. Retailers “generally struggle to survive and adapt to changing behavior as consumers change the way they shop and pay,” he said.

Why you might think twice

Even though buy now, pay later is becoming increasingly available, experts say that you should be careful when using it. The type of product that companies like Klarna and AfterPay offer are not federally regulated as a credit product in the United States.

On the one hand, you should be aware that if you missed a payment you may be charged a late payment fee, depending on the service you used.

For Klarna, it’s a $ 7 fee. For AfterPay, it’s a $ 8 fee. Affirm doesn’t charge a late fee, and PayPal says the amount of consumers used varies from state to state.

And missing payments through some services can affect customers’ creditworthiness.

“The problem is, it can create a permanent new normal that will sink you deeper into the hole,” said Baucells, a professor at the University of Virginia. If customers want to pay later, “this should go hand in hand with a certain tightening of the belt”.

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