Pandemic makes new ‘buy now, pay later’ options mainstream

Eager to win over online shoppers, retailers are turning to a growing number of buy-now, pay-later services that put a new twist on layaway: Get your purchase now, and pay it off in installments.

Dozens of national chains, including Walmart, Macy’s, Sephora, Neiman Marcus and DSW now allow shoppers to pay for everyday purchases in biweekly increments with the help of such programs as Affirm, Afterpay and Klarna. But consumer protection experts warn that such services are often unregulated and a potential slippery slope for those who make impulse buys.

The explosive growth of such services - which have jumped as much as 200 percent during the coronavirus pandemic- coincides with two key trends of the public health and economic crises: The shift to online shoppingand a growing distrust of credit cards, particularly among younger shoppers.

“It’s a perfect storm of the pandemic, plus online shopping and people being more debt-averse,” said Ted Rossman, an analyst at Creditcards.com. “But the concern, as with any sort of debt, is that you’ve got to pay it back . . . . There’s a risk of overextending yourself.” Most services require basic information, such as the applicant’s date of birth and phone number, and sometimes they run a credit check, though executives said it is not required. Customers also are asked to provide a credit or debit card to backstop their payments, though the vast majority — 90 percent at Afterpay, for example — use debit cards.

Payments are typically deducted every two weeks until a purchase has been paid off. If a user falls behind, some services charge late fees in lieu of interest — at Klarna, for example, it’s $7 — and restrict users from making more purchases until they’ve cleared their balances.

For apparel and beauty retailers, the payment programs have become a way to reach uncertain shoppers during turbulent times. Many of the services come with snappy names like Bread, Sezzle and Splitit, and are easier to market online than store credit cards, Rossman said. He noted that retailers often shoulder higher processing fees for each pay-later transaction — about 6 percent instead of 3 for a typical credit card transaction.

Shoppers who use paylater options also tend to spend more and buy more frequently than those who do not, he said.