Want to get a new coat without paying the full price up front? That’s becoming a more popular payment option for consumers, resulting in a windfall for the few companies that facilitate such services.
What’s going on: Square, which owns the Cash App, announced on Sunday that it will purchase Afterpay for $29 billion, making it the largest acquisition of an Australian company in history.
Meanwhile, Klarna, a Swedish company, raised money in June at a valuation of nearly $46 billion. Affirm, a San Francisco-based startup that went public earlier this year, now has a market capitalization of nearly $15 billion (and its stock is up 8 percent in premarket trading)
These companies work with retailers such as Target (TGT), H&M, Sephora, Macy’s (M), and ASOS (ASOMY) to offer customers the option of paying in installments at the checkout. This allows shoppers to purchase a $200 handbag for just $50 up front, without having to pass a credit check. The balance is paid off in installments over the next few months, usually without interest.
Afterpay, for example, covers the entire cost for the retailer right away, minus fees.
For decades, so-called “point of sale” lending has existed. However, the service has grown in tandem with a surge in online shopping during the pandemic, which has wreaked havoc on many families’ finances.
“Buy now, pay later” grew 215 percent year over year in the first two months of 2021, according to Adobe. More retailers are signing up for the service, which makes sense given that customers who use it place orders that are 18 percent larger than those who don’t.
“Trends fueling growth include digitization, rising merchant adoption, increasing repeat usage among younger consumers and an expanding set of players,” McKinsey said in a report published last month.
Last year, PayPal (PYPL) launched its own service. Executives said on the company’s earnings call last week that its “buy now, pay later” product racked up $1.5 billion in payments in the most recent quarter, and that more than 7 million customers have completed more than 20 million transactions.
Veterans who have long dominated the payments industry are also paying attention. According to McKinsey, the popularity of “buy now, pay later” options is causing banks to lose up to $10 billion in annual revenue.