What’s that old saying about everything that’s old is new again?
To that list, you can add how more and more shoppers are paying for their merchandise purchases. A new wave of “buy now, pay later” services are starting to gain attention at both physical and online stores, offering another option to such well-established payment processes like credit cards and layaways.
Services like Klarna, Affirm and Afterpay first showed up in-ecommerce transactions but are now moving into traditional retailers like Macy’s and Neiman Marcus, hoping to appeal to a new generation of shoppers that may not want to pay by credit card.
These services work very similarly to legacy charge cards: consumers make a purchase and agree to pay for it over time, sometimes in four payments for smaller items, more for larger ones. They are not charged any interest on their purchase: instead the merchant pays these third party services a fee which according to those involved can run double or triple the usual 2 to 5 percent credit card transaction fee. Late fees are collected from the consumer however when they do not pay on time.
For the retailers using these services, the costs are higher since they often make a substantial share of their profits on their own credit card fees and late charges. But they can bring a customer to the store who might not have been shopping there before. “Customers, particularly younger ones, were asking for a buy now, pay later option,” Macy’s CEO Jeff Gennette told the Wall Street Journal in announcing the retailer’s hook-up with Klarna. “If we didn’t have it, they might have gone elsewhere.”
Macy’s, which also invested in Klarna last year, said 40% of its shoppers using Klarna are new to the store and close to half of them are under the age of 40, nearly double the percentage of Macy’s existing customer base.
For companies like Klarna, which is based in Sweden, the opportunities are quite attractive: with a just-announced new round of financing the company is now valued at $31 billion, triple what it was just six months ago.
Services like Klarna have become more popular in Europe versus the U.S. where they represented just 1.6% of e-commerce payments last year, according to Worldpay Group Inc., a payment processing company. But it predicts that share will grow to 4.5% by 2024.
Whatever you call it and however the sale transaction goes, it continues to prove that the American consumer loves the idea of immediate gratification…as long as they can pay for it later.