How ‘Buy Now, Pay Later’ Services Became a Savior for Retail This Holiday Season

In a pandemic-plagued shopping environment, millions of Americans sought to stretch their dollars and avoid debt by using “buy now, pay later” services — and that might’ve helped rescue retailers this past holiday season.

Offered by companies like Afterpay, Klarna, Quadpay and Sezzle, “buy now, pay later” allows customers to make purchases via installment plans over the course of weeks or even months, rather than immediate in-full payments. Although it’s been around for years, experts have suggested the recession spurred by the COVID-19 health crisis has accelerated the use of the service — which can not only mitigate buying stress for consumers living paycheck to paycheck, but also prevent retailers from having to significantly discount merchandise as they see a pullback in discretionary spending.

“With the economy so uncertain, installments can make purchases more accessible to consumers — and so from that perspective, it’s no surprise it was a big deal at the holidays,” said Nikki Baird, VP of retail innovation at management solutions firm Aptos. “It’s basically a modern-day version of layaway — without the retailer having to carry any of the risk of holding the inventory or trying to collect payment and with the consumer being able to get instant gratification of taking home the purchase. That makes it a win-win.”

Even though shoppers can get their goods after only paying for a portion of their receipts upfront, retailers receive the full amount of the transaction at the point of purchase — with the “buy now, pay later” provider assuming liabilities. Major nationwide chains like Belk and Neiman Marcus, as well as sportswear brand Adidas, fast-fashion giant H&M and shoemaker Keen, are only some of the boldface names in retail that have adopted the service to convert visitors into customers.

Today, Afterpay released data that showed a 30% increase in the average basket size for United States-based consumers for the Oct. 1 through Dec. 31 period compared with the prior year’s holiday shopping season. Traffic to its brand partners was also strong; the Australia-headquartered company reported a 145% year-over-year boost in referrals to its global merchants.

“As shoppers returned to stores this holiday season, we saw a rise in services like buy online, pick-up in store and contactless payments,” said VP of retail Alex Fisher. “We’re proud to be driving the adoption of both contactless payments and flexible spending in stores, meeting the demand for a true omnichannel experience for retailers and shoppers alike.”

What’s more, a survey last month by CouponFollow found that 73% of customers said that they added an item to their carts or bought a more expensive product due to the monthly installment option afforded by “buy now, pay later.” The online deal platform added that one in three respondents shared they would not have been able to make their latest purchases without the service.

Over the past few years, “buy now, pay later” has surged in popularity, particularly among younger consumers like millennials and Gen Zers who may have lower discretionary incomes and are often categorized as debt-averse. These consumers, according to experts, have expressed a preference to pay with debit cards versus credit cards that can spiral into revolving debt and come with costly fees.

While some companies don’t charge a fee for “buy now, pay later” purchases, other transactions come with minimal interest rates. Because most customers use the service for higher-priced buys, they face the risk of accruing debt if they’re unable to make their payments on time.

“While the retailer benefits from the sale and the cash, the one at risk is the customer due to payment terms, interest rates and the like,” explained Farla Efros, president of consulting firm HRC Retail Advisory. “The responsibility is on consumers, and they could risk poor credit ratings if they’re unable to pay in full. So, if retailers are to move in this direction, hopefully they have the appropriate infrastructure to allow for pre-approvals in order to avoid the potential risk for consumers.”

As e-commerce continues to grow, experts predict that the “buy now, pay later” model will gain even more traction and win over shoppers looking for affordable ways to purchase nonessentials. Still, while it can be wise to take advantage of the service to help manage finances in coronavirus times, some caution against getting too click-happy online.

“‘Buy now, pay later’ is a great way to help consumers who are in a short-term bind,” Baird added. “I don’t think it should be a long-term strategy for either the consumer or the retailer — and retailers would do well to remember that Gen Z seems to hate credit, so future generations may be much more conservative in their thinking there.”

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