BUY NOW, PAY LATER

Instalment plans have long been a way for shoppers to make large purchases. Now, several financial technology startups are putting smaller purchases on instalment too.

This year, Australia’s Afterpay — which also operates in New Zealand — began offering instalment plans in the US, joining Affirm, a San Francisco company. Payment company Square announced its own instalment plan in October, as did Swedish company Klarna, which has teamed up with H&M.

Affirm and Afterpay say they’re targeting millennial shoppers by filling a gap between credit cards and store credit, which require lots of paperwork and a strong credit rating. Consumers apply online or via app and learn within seconds whether they’ve been approved. They click a button on the websites of participating retailers if they want to pay by instalment.

Clothing retailer Cotton On began offering US instalments through Afterpay in August. E-commerce chief Brendan Sweeney says 20 per cent of buyers are already using the feature, which breaks bills into four equal parts spread over six weeks and charges no interest.

“I was kind of sceptical that there would be a market for people interested in instalments, but there clearly is,” he says. “We’ve seen a remarkable uptake from millennial customers.”

Afterpay Touch Group caught on quickly with Australian millennials, many of whom abandoned credit cards after the 2008 recession.

The company charges no interest, but collects a fee of as much as 6 per cent of a sale from the retailer. Afterpay works with 20,000 merchants globally.

Afterpay is betting American millennials will be just as keen on its service as their Australian counterparts. The company says 65 per cent of the US cohort don’t have a credit card.

Affirm issued more than US$1 billion in loans last year, and expects to double that this year. It charges retailers a fee or consumers interest, which can be as much as 20 per cent. Repeat customers, who have shown they can repay loans, typically pay lower interest. Those who default may be turned away next time.

Affirm and Afterpay typically approve more than 80 per cent of applicants, compared with about 50 per cent for US store credit.

The industry is tiny and its proponents say there is plenty of room to grow in the US, where more than half of consumers have poor credit.

Afterpay has come under fire in Australia for late fees that made up about a fifth of its revenue in the first half of the year, and the Australian Senate launched an inquiry into buy-now-pay-later businesses.

So far, no such issues have emerged in the US, but consumer watchdogs are already paying attention. “These services were created to facilitate impulse shopping that, for many, jeopardise their ability to afford necessary expenditures and to build needed savings,” says Steve Brobeck, senior fellow at the Consumer Federation of America.