SAN FRANCISCO -- As Americans shop for the holidays, they will likely see a swarm of offers to get their gifts now but pay for them later in fixed monthly installments.
Fueled by several hot Silicon Valley startups as well as a push by the big credit card companies, "buy now, pay later" is now available for purchasing a Peloton exercise bicycle as well as a fancy floral bouquet.
Thousands of retailers, big and small, often have an option on their websites to pay for a purchase in installments at checkout. In the case of credit cards, customers are being allowed to create fixed-payment plans days or even a few weeks after the purchase.
Americans seem to be champing at the bit to try this financial option, which has been common outside the U.S. for some time. One major credit card company says roughly six out of every 10 of its U.S. customers started a buy-now, pay-later program for the first time this year, and the Silicon Valley-backed companies that offer these plans are seeing tens of thousands of new customers every week.
"My shopping habits can be a bit impulsive, so I like the ability to break it up over several payments," said Shahin Rafikian, 26, who lives in Los Angeles and has used several buy-now, pay-later services to purchase concert tickets, vinyl records and other items.
Rafikian said he would have likely purchased fewer large-ticket items if the cost had just gone onto a credit card that never got paid off.
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Industry advocates say buy-now, pay-later programs are preferable to credit cards because there are fixed monthly payments and any interest is clearly stated upfront. Consumer advocates, typically skeptical about any new financial product, also have been relatively more positive about buy-now, pay-later since any plan would have a beginning and end date. Most of their worries concern any fees that might be associated with late payments.
"These products do encourage people to pay purchases off quicker and usually with less interest, but if people are using them to simply buy more than they should and getting over their heads, paying late fees, etc., are they really helping manage people's expenses?" said Lauren Saunders, associate director for the National Consumer Law Center.
Adobe Digital Economy Index, which analyzes direct consumer transactions online. said revenue on Cyber Monday from buy now, pay later plans rose 21% from a year ago.
Buy-now, pay-later is not a new product -- services or products such as layaway, monthly payments on large purchases and even retail credit cards have existed for decades. What's different is how it's being offered, and who is offering the service.
Instead of telling a customer to apply for a store-branded credit card, which often can be used only at that retailer, companies have added financing options provided through third-party companies such as Affirm, Afterpay or PayPal at their online checkout.
There are typically two different types of buy-now, pay-later services: the short-term payment plans that break a purchase up into four or six biweekly payments, and the longer-term installment loan-like products that Affirm offers.
PayPal co-founder Max Levchin started Affirm in 2012. The $32 billion company went public this year.
With its buy-now, pay-later widget on many retailers' websites, the company has seen robust growth in the past few years. Affirm said in November that 8.7 million Americans are using its buy-now, pay-later services, more than double from a year ago. The company signed up 1.6 million new customers in the U.S. and Canada just in the past 90 days.
Two major retailers -- Walmart and Target -- have partnered with buy-now, pay-later companies like Affirm. Walmart got rid of its layaway program in favor of buy-now, pay-later.
INTEREST, FEES
The cost of doing pay-over-time can vary with Affirm and other buy-now, pay-later providers. A six- to eight-week purchase may carry no interest at all. In some cases, the merchant has decided to pay the interest for the customer. But other consumers could pay as much as 30% annual interest on these large purchases with Affirm.
Afterpay does not charge interest on its purchases, but does charge borrowers a late fee if they miss a payment, up to 25% of the loan's value. Affirm does not charge late fees on any purchases, but typically is willing to lend larger amounts and charge interest on longer-term loans.
Credit card companies, seeing the potential impact of buy-now, pay-later on their business model, have tried to adapt. American Express, JPMorgan Chase and Citigroup all now offer similar payment plans for items purchased on their cards. A report by consulting firm McKinsey found that buy-now, pay-later startups diverted between $8 billion and $10 billion in revenue from traditional banks that would have likely financed these purchases a few years ago.
AmEx said 58% of its customers have set up purchase plans for the first time this year, and more than $5 billion worth of purchases have been put on "Pay It, Plan It" agreements.
The rapid growth of buy-now, pay-later has also caught the attention of politicians and regulators. The House Financial Services Committee held a hearing on buy-now, pay-later programs last month. Lawmakers asked the Consumer Financial Protection Bureau to put more emphasis on monitoring the growth of this type of financing.
"These products raise important questions about the use of consumer data, the exploitation of spending patterns, the application of lending laws and the potential for unsustainable levels of consumer debt," said Rep. Steven Lynch, D-Massachusetts.
The concern about overspending with these programs is real, Rafikian said.
"At first it was fun to have access to items typically out of my price range, but sometimes you get surprised and a little miserable that you have all these new payments due," he said.