‘Buy Now, Pay Later’ Installment Plans Are Having A Moment Again

Fintech companies have brought back an old-fashioned way of lending, and now even Apple and Goldman are getting in on the action. ‘Buy Now, Pay Later’ Installment Plans Are Having A Moment Again

You’re shopping online, about to hit the checkout button, when something catches your eye. It’s an intriguing offer. Instead of buying your item the old-fashioned way with your credit or debit card, you can pay for it in an even more old-fashioned way, familiar to anyone who shopped at department stores before plastic became ubiquitous: on an installment plan.

Unlike credit cards, on which a borrower paying a minimum could carry a balance indefinitely, these loans are designed to be paid off in a set number of payments—often four. And they’re linked to a specific purchase rather than being a general line of credit.

In general, these programs make the lion’s share of their money on fees from retailers, rather than from interest paid by consumers. Stores are willing to pay because the programs make it easier for customers to say yes to items with price tags that might otherwise make them queasy.

“We are in the business of turning browsers into buyers, which is fundamentally a merchant service,” Affirm Holdings Inc. Chief Executive Officer Max Levchin told Bloomberg TV in July. His company gets a bit under half its revenue from merchant network fees, with a smaller chunk coming from interest income.

Americans spent an estimated $20 billion to $25 billion using deferred payments in 2020, according to a March report by analytics firm CB Insights. Worldwide, that same report projects that transactions through such plans could grow 10 to 15 times by 2025, topping $1 trillion. According to Bloomberg Intelligence, buy now, pay later’s penetration in the U.S. may be 3% of e-commerce, but there’s room to grow—it’s about 10% in Australia.

Silicon Valley giants are trying to muscle in on the business pioneered by the fintechs. PayPal Holdings Inc. rolled out its own buy now, pay later feature, Pay in 4, last year. Now Apple Inc. is looking to offer its own spin, with plans to build the functionality into its Apple Pay platform, Bloomberg News reported.

Banking giant Goldman Sachs Group Inc. will be the behind-the-scenes lender for the new Apple Pay product. “Apple and PayPal getting into this is an indicator that this kind of flexibility—this kind of ‘fintech-ification’ of our everyday commerce experiences—isn’t going to go away anytime soon,” says Lily Varon, a senior analyst at Forrester Research Inc. “This isn’t a blip.”

The pandemic lockdown fueled an e-commerce spending spree that seems to have accelerated the adoption of buy now, pay later. But the programs may also appeal to younger consumers who are wary of credit cards. Although buying on installment is very much a form of borrowing, it’s set up to feel easier to swallow.

Many plans charge no interest. Afterpay Ltd. has no credit check, while some other programs do only “soft” checks that don’t affect a consumer’s credit score. Having a set period to pay back may also feel more manageable. The big opportunity for growth in the business is “either people that don’t really have credit or people that don’t really like using credit cards,” says Dan Dolev, an analyst with Mizuho Securities USA.

Installment companies say they’re more transparent and simpler than credit cards, and take steps to protect vulnerable borrowers. Afterpay, for example, cuts off further purchases as soon as a payment is missed. “Creating opportunities for consumers to buy that make them feel safe and smart and responsible is a good thing,” Affirm’s Levchin told Bloomberg TV. Taken as a whole, though, the explosion of new programs means consumers have a lot more ways to put off payments and get into debt—and a lot more complexity to navigate.

Each program has its own set of rules on fees, rates, and credit reporting. Afterpay charges late fees of up to $8. Affirm has no late fees, but unlike Afterpay it may charge interest on some purchases, depending on the retailer. Afterpay’s installment plans are designed to be paid off in four chunks over six weeks, while Affirm offers different schedules that may stretch out as long as 60 months.

It’s expected that Apple Pay will offer both a short-term pay-in-four plan and longer-term options. “It’s not clear to me that consumers can easily delineate between the different products that are out there,” says Chuck Bell, programs director in Consumer Reports’ advocacy division. “There will likely be more oversight at some point, because I think the problems are not going to go away.”

In July, the U.S. Consumer Financial Protection Bureau, the watchdog overseeing consumer lending practices, published a blog post about buy now, pay later programs. While it didn’t criticize the practice, it advised consumers to look out for late fees and noted that since some programs are linked to a consumer’s debit card, there’s a risk of automatic installment payments triggering bank overdraft fees if the money’s not there.

Installment pay companies have come in for more scrutiny in other countries where they’ve gained a foothold. Sweden recently passed a law requiring that non-debt payment options, when there are any, be presented first online. The U.K.’s financial regulator published a report that said the industry “poses potential harms to consumers and needs to be brought within regulation.” One risk it highlighted: Consumers could have multiple outstanding transactions across several platforms, adding up to high levels of indebtedness.

Forrester’s Varon says consolidation in the industry is inevitable, given the sheer number of players worldwide and the hunger for expansion. Affirm earlier this year completed the acquisition of Canada’s PayBright. And Apple and PayPal have paved the way for more traditional financial firms to enter the fray. “They’ll probably see more banks moving into the buy now, pay later space,” says Anisha Kothapa, a senior analyst at CB Insights. She points to Goldman Sachs’s MarcusPay offering and installment options being developed by Visa Inc.

As companies in the sector get more experience with their customers, they’ll develop an ability to better underwrite credit risk, says Zachary Aron, principal in the payments and banking consulting practice at Deloitte. That will enable them to offer more tailored loans. “Those are ways we really think financial institutions can be on the side of the customer,” Aron says. “Being able to use that information as education, coaching, guidance, support.” Not to mention making it even easier to click “buy.”

Updated: 9-15-2021

How Old-Style Buy Now, Pay Later Became Trendy ‘BNPL’

Millennials and Gen Zers have an addictive new way to buy stuff that would look familiar to their great-grandparents. “Buy now, pay later” is a type of consumer credit that really got going in the 19th century when Singer sewing machines were sold for a “dollar down, dollar a week.”

But the modern fintech twist in “BNPL” is that it’s aimed at people making impulse purchases of fashion or jewelry or electronics rather than sofas or refrigerators. It’s delivered through apps that are wildly popular, leading to dizzying valuations of startups such as Klarna, Affirm and Afterpay. Regulators from the U.K. to Singapore worry that young borrowers are getting in over their heads.

1. How Did It Originate?

The “installment plan” is the precursor to today’s BNPL craze. Paying off purchases weekly or monthly evolved from 1840 onward, as makers of furniture, pianos and farm equipment looked to make products more attainable. Cars later brought installment credit further into the mainstream, though credit cards eventually became the preferred way to spread payments on smaller purchases.

2. Why Not Use Credit Cards?

They tend to be disliked by the young people flocking to BNPL; Britain’s Financial Conduct Authority cites data showing 25% of users are between 18 and 24 years old, and half are 25 to 36. As a group, young shoppers are wary of providers that profit when customers don’t pay their balances. They prefer the feeling of control they get from fast BNPL payment schedules, often spread over four to six weeks. Because of these, and because purchases are generally cheap, they’re usually interest-free.

3. What’s New Here?

Most BNPL isn’t about buying big-ticket items; it’s about using an app to snap up that must-have jacket in the expectation that you’ll pay it off quickly. The average spend on a transaction in the U.K. using Klarna Bank AB’s app is 75 pounds ($99).

4. Why Is It So Popular?

The apps are simple and typically involve only minimal credit checks, or none at all with Afterpay Ltd., a Melbourne-based firm that offers payments spread over six weeks. Retailers — which pay the BNPL provider a small percentage of the transaction value, as they do with credit cards — frequently tell shoppers there’s “no need to wait until payday.”

5. What About Late Payments?

San Francisco-based Affirm Holdings Inc. doesn’t charge late fees, nor does Klarna on its “Pay in 30 days” product, though many of their peers do. BNPL customers who don’t pay bills are blocked from further purchases and may be passed on to debt collectors.

6. Who Dominates?

Stockholm-based Klarna is the BNPL beast: With a $45.6 billion valuation, based on a June 2021 fundraising round, and 90 million users, there are huge expectations about an initial public offering, possibly within the next couple of years. Klarna’s biggest rivals, Affirm and Afterpay, have millions of customers, too, and the competition is intensifying as banks, credit card companies, fintechs and shopping sites team up to go after the business.

U.S. tech entrepreneur Jack Dorsey’s Square Inc., a mobile payment company, agreed in August to acquire Afterpay for $29 billion. PayPal Holdings Inc. agreed to buy Japanese BNPL provider Paidy Inc. for $2.7 billion in September.

7. How Big Is BNPL?

Global sales using BNPL were $93 billion in 2020 and could top $181 billion by 2022, according to Bloomberg Intelligence. That’s still a small percentage of online retail — 1.6% in 2020 — but the share was growing fast. The U.S. is a juicy prospect because of lower BNPL penetration of the market there. Lifting that to levels seen in Australia and the U.K., among the most developed markets, would push yearly BNPL sales in the U.S. from about $20 billion to $100 billion.

8. What’s The Worry?

That it could be a form of irresponsible lending. Some regulators worry that painless borrowing is a “gamification” of shopping similar to Robinhood Markets Inc.’s stock trading app, creating a sense that spending isn’t real.

Consumers could load up on debt using different apps and then overdraw their bank accounts or take on credit card debt to service their BNPL accounts. The possibility that BNPL leads people into a chain of borrowing elsewhere could create hidden risk for the banking system.

The Australian Securities and Investments Commission found that, over a year, 15% of BNPL users had to take out another loan to make their payments, and 1 in 5 cut back on buying essentials. Britain’s FCA says the sector must be regulated, Australia has a new code of practice designed to prevent customers from borrowing more if they’re having difficulty with repayments, and California has fined unlicensed lenders.

Updated: 9-16-2021

Amazon Is Doing It. So Is Walmart. Why Retail Loves ‘Buy Now, Pay Later.’

Retailers big and small are using installment plans to wring more sales out of shoppers who can’t get credit cards

Alexis Luedtke got her first “buy now, pay later” plan in 2019 after she was rejected for a credit card. She has used at least five more since to buy face cream, T-shirts and birthday gifts.

Installment plans are back in style. PayPal Holdings Inc. last week said it was buying Japanese installment payment startup Paidy Inc., following Square Inc.’s $29 billion deal for Afterpay Ltd. Macy’s Inc. and Bed Bath & Beyond Inc. have added the option at checkout over the past year. Even Amazon.com Inc. is doing it.

One Reason: shoppers like Ms. Luedtke who don’t qualify for credit cards. Buy-now-pay-later companies say they rely less on—and in some cases bypass altogether—traditional credit scores and reports. Doing so allows them to approve more consumers.

Shoppers gain the ability to buy things even without cash on hand—translating to higher sales for retailers.

Afterpay said it expects the company’s U.S. merchants will see an $8.2 billion increase in sales this year because of payment plans. Affirm Holdings Inc. last year said purchases made with its payment plans were 85% larger, on average.

Shoppers spend more at Macy’s when they use installment plans offered through Klarna Bank AB, Macy’s CEO Jeff Gennette said on a recent earnings call. Klarna also is helping the retailer attract younger customers, he said.

“The value that most retailers see in buy now, pay later is customer acquisition,” said David Sykes, Klarna’s North America head.

Ms. Luedtke, 26, has credit cards now but still prefers installment plans. Just last month, she used them to buy about $40 of Peter Thomas Roth skin-care products and $65 in clothing from Shein.

“It definitely influences how much more I buy or would spend,” she said. “It’s easier to pay $200 over so many weeks compared to $200 right now.”

Buy now, pay later is a new twist on an old idea. Big retailers have for decades offered installment plans for big-ticket items like washing machines. Today, these plans come in a variety of flavors. Afterpay offers payment plans that shoppers usually attach to their debit cards. Others, like Affirm, also facilitate new loans.

Interest rates and other terms vary by payment-plan provider. Affirm interest rates range from 0% to 30%, with some 43% of its transactions during its last fiscal year not charging interest at all. The company doesn’t charge late fees. Afterpay doesn’t charge interest but does collect late fees.

Merchants take no credit risk with these plans, but the fees they incur can be higher than on credit-card purchases—often between 3% and 5% of the purchase price, according to people familiar with the matter.

Buy-now-pay-later companies say they can approve more customers than banks, including people who have thin or no borrowing history. Some 53 million adults in the U.S. lack traditional credit scores, according to FICO score creator Fair Isaac Corp. Installment plans are safer, they say, because they are often smaller than credit-card spending limits and approved on a per-transaction basis.

Affirm said that it had a net charge-off rate of 1% in the quarter ended June 30, down from 2% a year earlier. Afterpay said it wrote off 0.6% of the total dollars it processed in payments during the company’s fiscal year ended June 30, up from 0.4% the year prior.

Working with a web of retailers, buy-now-pay-later companies can create self-contained payment ecosystems. They factor payment behavior into future underwriting decisions. Customers who pay late or not at all risk losing the installment option at other participating retailers.

“Most merchants want a partner who has real advantage and real ability to underwrite,” said Affirm CEO Max Levchin. “These are not deeper approvals, but they are different approvals.”

Amazon and Walmart Inc. are both working with Affirm. Both have said they want their financial partners to extend credit to more of their customers.

Amazon is reviewing proposals, as it weighs whether to replace its longtime card issuer, JPMorgan Chase & Co. Amazon is looking for “commitments to underwrite competitively to widen the acquisition funnel,” the retailer said in a request for proposals reviewed by The Wall Street Journal.

A desire to boost loan approvals was among the reasons Walmart in 2018 decided to end its decadeslong credit-card partnership with Synchrony Financial. (Capital One Financial Corp. now issues Walmart-branded credit cards.) The retailer made Affirm loans available to most of its customers the following year.

“Our goal is financial inclusion for all,” said Julia Unger, Walmart’s vice president of financial services.

Some banks now offer installment options on their credit cards. Citigroup Inc. saw a sevenfold increase in the dollar amount of credit-card purchases converted to installment loans in July, compared with the same month a year prior, said Gonzalo Luchetti, head of Citigroup’s U.S. consumer bank.

Synchrony, the largest U.S. store-credit-card issuer, will launch a buy-now, pay-later plan in October. Capital One will test out its own offering later this year, CEO Richard Fairbank said at a conference Monday.

Wells Fargo & Co. and Bank of America Corp. are exploring adding installment plans on their credit cards, according to people familiar with the matter. Visa Inc. said it has been testing out ways for shoppers to check if they qualify for installment plans when they enter their card numbers at checkout.

Updated: 9-18-2021

When To Buy Now, Pay Later, And When To Just Pay Now

For those who choose to pay in installments, make sure to read the fine print.

Digital buy now, pay later services are surging in popularity. While they offer consumers appetizing convenience, these services also leave some with regrets.

Companies such as Affirm and Klarna Bank AB enable shoppers to purchase products online, have them delivered as usual, then pay for their order in installments. Sometimes these services come with interest and sometimes they are interest free.

This app-based version of layaway—making small payments for an item over time—has skyrocketed in usage among both consumers and retailers. Afterpay Ltd. , one of the most popular platforms, said sales among its U.S. merchant partners will increase by $8.2 billion this year thanks to payment plans.

Research firm Kaleido Intelligence estimates that by 2025, online consumers around the globe will have nearly doubled the amount of money they spend using buy now, pay later services to $680 billion.

As these apps grow in usage, so do complaints. Regulators in the U.K. have curbed the ways in which buy now, pay later companies can advertise their services. Last year, a California oversight board required several of these companies to refund consumers hundreds of thousands of dollars.

A recent national survey of nearly 3,500 adults found that one in five Americans made a purchase using a buy now, pay later service in the past year. The survey, conducted by research firm Momentive, also found that one in six Americans who used such services regretted doing so, citing high interest rates, minimal options to build their credit, or simply having bought things they couldn’t really afford.

‘What jumped out at me right away is that the appeal of buy now, pay later is the same as the potential problems.’
— Jon Cohen, chief research officer at Momentive

Buy now, pay later services say they are a better alternative to traditional banking and credit institutions, offering access and flexibility to credit-spare consumers. An Affirm representative said that it underwrites loans for individual purchases rather than extending a single line of credit, a process that is partially based on a consumer’s ability to pay it back.

Klarna said that its policy of revoking access after missed installments—and increasing purchase limits according to on-time payment behavior—is designed to encourage responsible spending.

Here’s what you need to know about buy now, pay later apps and the important differences between the services.

Make The Payments, or Pay Interest

Payment schedules vary among the services, but generally the cost of a purchase is split into four interest-free installments paid over six weeks.

Afterpay customers are required to repay in full within six weeks. When customers miss a payment, the company revokes access to the Afterpay platform and charges a late fee for the missed installment. The company said 95% of transactions don’t incur late fees.

Affirm allows the flexibility of spreading purchases anywhere from six weeks to 60 months, with 0% to 30% interest, the company said, depending on the merchant, product and its underwriting process. The company said its biweekly payments are always interest-free.

Affirm’s interest rate and options are determined by purchase amount, merchant terms, credit usage and other existing loans the consumer might have with the company. If you purchase a $1,000 sofa with Affirm and choose to pay it off over a year, you could be offered a 16% interest rate. That means you would pay about $97 per month.

Keep track of your purchases carefully, said Chelsea Ransom-Cooper, managing partner and financial planner at Zenith Wealth Partners. Using this method of payment for multiple, concurrent small to midsize purchases can stack up quickly, said Ms. Ransom-Cooper.

Repayment for most of the services is automated by default. Klarna requires users to connect their debit card, credit card or bank account, for example. Most services also send text reminders of an upcoming charge.

When to Use It

Only use buy now, pay later for things you can’t pay off on your monthly credit-card bill, said Ms. Ransom-Cooper.

“Leaning on these apps for emergency purchases can be a helpful way to give yourself a little more time than your credit card will,” she said.

Another benefit of these services are the favorable terms of borrowing for those with little credit or a short credit history, especially for larger purchases, according to financial analysts.

If used responsibly, buy now, pay later services can “level the playing field” for those shut out of credit access, said Sheridan Trent, a research analyst at the Strawhecker Group, a consulting firm that focuses on electronic payments.

Know What You’re Not Getting

Even though consumers are encouraged to essentially borrow money and pay it back in a timely and responsible manner—as they would with a credit card—those payments don’t necessarily help them build credit history, said financial analysts and authors.

“You’ve taken out a loan that, because it’s not a revolving credit line, the chance for it to be negatively on your credit, as opposed to positive, is higher,” said Grant Sabatier, co-founder of BankBonus.com and author of “Financial Freedom,” referring to Affirm loans.

Affirm doesn’t report payments on its four biweekly payment zero-interest loans, it said, or when consumers are offered a three-month payment option with no interest. Afterpay doesn’t work with credit bureaus at all. Sezzle Up explicitly informs users that it will report on-time payments to Equifax and TransUnion.

Missing A Payment

Just as with a credit card, there are consequences to late payments for buy now, pay later services.

Affirm doesn’t charge late fees, but late or partial payments can hurt your credit score, and may prevent you from using the service in the future. Sezzle Up also reports delinquencies.

Klarna and Afterpay revoke access to their platform until payment is made. Both companies also charge late fees, tacked onto your next payment. Afterpay charges $8, or 25%, of the purchase, whichever is less, while Klarna charges a maximum $7, or no more than 25%, of the past due amount. Klarna said it will contact users to collect payment before charging a late fee.

Financial planners stress the importance of keeping track of your installment payments, as you would any bill.

“Documenting the payment schedule will help you factor the payments into your budget,” said Ms. Ransom-Cooper.

Kristen Euretig, a certified financial planner and founder of Brooklyn Plans, said new clients of hers who use buy now, pay later apps often pay the first installment and forget about the remaining charges during the intake session.

“It’s not something that occurs to people,” she said. “Student loans, of course. Credit cards, yes. And then this is technically a debt that needs to be repaid. So it seems to not stick in people’s minds the same way.”

Try Not To Make It A Habit

Buy now, pay later apps are built to encourage repeat purchases by making it easy to buy items without paying full price immediately, said Mark Palmer, managing director and fintech analyst at financial-services firm BTIG.

“It becomes almost part of their lifestyle as a consumer to purchase things using buy now, pay later and get access to them weeks before they would be able to otherwise,” said Mr. Palmer.

The services are designed to remove as much friction from the checkout process as possible, which can make spontaneous purchases easier and faster, says Ms. Euretig.

“It’s very savvy,” she said. For most of the services, the pay later button is right next to the buy button. This makes it just as easy for a consumer to choose either option.

“There’s an exit door from the realization that you can’t afford this right now.”

Updated: 9-21-2021

Even Goldman Sachs Is Jumping Aboard Buy Now, Pay Later

Investors are flocking into fintech apps offering short-term, interest-free loans for fashion and beauty products. Haven’t we seen these risks before?

People can be just the worst borrowers, failing to pay what they owe especially if defaulting doesn’t cost them their house or their car. That’s why credit cards charge eye-watering interest rates and late fees.

It’s also why cards and other unsecured consumer debt cause the biggest losses for banks during major downturns — and why central banks assume that consumer defaults bring the most pain in financial stress tests.

So it’s a bit of mystery why “Buy Now Pay Later” apps — which let users pay for purchases next month of in a few installments, without charging interest and often no late fees either — are the hottest thing in fintech. Investors have been throwing money at firms like Sweden’s Klarna and Australia’s Afterpay, driving valuations to dizzying heights.

Goldman Sachs Group Inc. and PayPal Holdings Inc. have also jumped into the fray, each striking $2 billion-plus takeovers this month.

It’s still too early to assess the true credit risks in these new technology-driven firms. But there are reasons to suspect that in tough times bad debts could bite hard.

Apps like Klarna and Afterpay mostly offer very short-term, interest-free loans for fashion and beauty products. The loans are interest-free because the shop pays a fee of a few percent to get its money straight away and to cover payment processing.

Retailers like Yoox or Net-A-Porter are also willing to pay because the apps draw in customers and encourage them to spend.

Use of the apps has been growing fast, especially during the pandemic. European transactions are up almost 100% in the past year and Klarna’s U.S. volumes jumped more than 300% in the first half of 2021.

Investors are flocking in. In Europe, Buy Now Pay Later firms have raised more than $2 billion from venture capital and private equity this year alone, according to Morgan Stanley.

This is pushing valuations to staggering levels. Mostly, they’re quoted as multiples of revenue because many of these firms don’t turn a profit. For example, Sweden-based Klarna was valued at $46 billion after it raised more venture capital funding this summer, according to Bloomberg Intelligence. That is 30-times its last 12 months’ revenue.

U.S.-listed Affirm Holdings Inc. trades at an even steeper 36-times revenue, while Australia’s Afterpay, which is being bought by Square Inc., now trades at nearly 40-times revenue. These are huge premiums on firms when the risk of big default losses is still highly uncertain.

Established finance companies are jumping in too. This month PayPal struck a $2.7 billion deal for a small Japanese Buy Now Pay Later firm called Paidy. And last week, Goldman said it would pay $2.2 billion for a home-improvement lender called GreenSky in its quest to conquer Main Street.

To be fair, though, GreenSky lends to homeowners in a slightly more traditional way, providing bigger loans over longer periods, and with interest, for things like new bathrooms or windows and doors. Also, Goldman is paying about 30-times earnings over the past 12-months, according to Bloomberg data, as opposed to 30-times its revenue.

Most Buy Now Pay Later apps offer what looks like credit-card lending, but with smaller loans of up to a couple of hundred dollars on average, depending on the country. The question is whether the credit risks are any different.

Klarna and peers argue they are. Users can only increase the amounts they borrow slowly based on good behavior. They have to repay when the money is due, usually after just 30 days, or in installments over a couple of months.

Afterpay makes new customers pay a quarter of any purchase upfront until they have a track record. If you don’t repay when you’re meant to, you get stopped from using the app, which should mean less risk for investors.

Credit cards, on the other hand, will give you a limit of, say, $2,500 straight away — an invitation to splurge. Customers can keep spending until they hit their limit, and the bank will just charge late fees for failure to repay, on top of hefty interest.

But banks do a thorough credit check before giving out a card. Buy Now Pay Later firms generally don’t, which might make them more risky, according to Morgan Stanley analysts.

The bigger risk, however, is that a high portion of these small loans go bad at the same time. Not only are many of the borrowers young — typically half are under 45 years old; at Klarna the average age is 33 — but the consequences of failing to pay are minimal. No interest and often no late fees means it’ll be easy to let the payment slide, especially if you’re in a pinch.

Unexpectedly high correlations among defaulters have caught lenders out before: Think of mortgages in 2008, especially in the U.S.

When the next recession comes, and there isn’t the kind of income support people have had during the pandemic, on-trend investors might find they’re the ones who have to pay later.

Updated: 10-6-2021

Most Shoppers Worldwide Keen on ‘Buy Now, Pay Later’ Loans

Most shoppers plan to use “buy now, pay later” loans in the next couple of years, according to a report that highlights the surge in new financial products that sidestep the world’s biggest lenders.

A poll of more than 6,300 people globally found that 20% have already taken out buy-now, pay-later loans, while about 60% think they will try the service within two years. This compares to about 45% who said they will use cryptocurrencies soon, according to a report published Thursday by technology consultancy Capgemini SE.

Fintech firms such as Klarna and Afterpay Ltd. have grown into multibillion-dollar companies by offering customers the option to pay in installments when they shop online. Buy-now, pay-later specialists have already diverted as much as $10 billion in annual revenue away from banks, according to research in July by McKinsey.

This boom has attracted scrutiny from regulators, who are concerned about money-laundering and the risk of unaffordable borrowing. Meanwhile, traditional financial giants including Goldman Sachs Group Inc. and Mastercard Inc. are trying to muscle in on the market.

About two-thirds of bank executives polled by Capgemini said challengers such as PayPal Holdings Inc., Stripe Inc. and Square Inc. were bigger competition than long-established lenders.

Overall, non-cash payments rose a meager 8% in 2020 after years of double-digit expansion were slowed by the pandemic, Capgemini said. Still, the report predicts that the rebounding global economy will fuel demand for alternatives such as cryptocurrency, wearable payments and digital wallets.

Updated: 12-19-2021

Equifax To Add More ‘Buy Now, Pay Later’ Plans To Credit Reports

Short-term payment plans for small-ticket items are growing quickly, creating a blind spot for lenders.

A popular kind of “buy now, pay later” plan is coming to credit reports.

Early next year, Equifax Inc. will begin recording installment plans that allow shoppers to make four biweekly payments instead of covering the full cost at checkout. The move is meant to give lenders a fuller picture of people’s financial commitments, including how much they owe on these plans.

These “pay-in-4” plans have exploded in popularity in recent years. They are often used for small-ticket items such as clothing and makeup and are typically billed directly to a shopper’s debit or credit card. A $200 shopping trip, for example, requires $50 upfront and three more $50 payments billed every two weeks.

Buy now, pay later is booming in the U.S. High-end and discount retailers alike offer the plans at checkout online. Some merchants also offer them in stores. But the plans often don’t show up on credit reports, creating a blind spot for lenders that use the information on the reports to gauge an applicant’s ability to repay.

“Responsible lending benefits from a complete picture of a person’s financial obligations,” said Equifax Chief Executive Mark Begor.

Billions of dollars of obligations go unreported. Buy now, pay later company Afterpay Ltd. , for example, did $9.8 billion in pay-in-4 plans in North America during the 12 months ended June 30, more than double a year earlier. Klarna Bank AB transactions during the first half of the year in the U.S. totaled $3.2 billion, up from $722 million during the same period in 2020. The majority are pay-in-4 plans.

The payment plans are small—the average Afterpay transaction is $150—but they can add up if shoppers use them frequently.

Credit-reporting firms have faced technical challenges adding short-term installment plans to credit reports. Most credit reports aren’t set up to display biweekly payments. And there is often a lag between when consumers open accounts and when lenders send that information for inclusion in people’s credit reports. The lag can outlast a fast repayment period.

Some buy now, pay later installment loans for big-ticket items are recorded on credit reports in the same section as personal loans. Far fewer of these smaller, short-term plans, which in most cases don’t require credit checks, are reflected in credit reports.

TransUnion said it doesn’t include these plans on its credit reports but is working with buy now, pay later companies to enable reporting next year. A small number of buy now, pay later companies submit information about these plans to Experian PLC, which then includes that data in credit reports. Experian is working with buy now, pay later firms to add more of this information to its reports.

Afterpay and Klarna, two of the biggest players in the business, don’t report their pay-in-4 plans to U.S. credit-reporting firms. Affirm Holdings Inc. said it reports the full payment history of some of its loans, including on-time payments and delinquencies. The company doesn’t report its pay-in-4 product. All three said they have been talking to the firms about potentially reporting these plans.

One stumbling block: The frequent opening and closing of accounts can drag down credit scores. The buy now, pay later companies want to make sure customers who pay their bills on time aren’t penalized for frequent use of their short-term payment plans.

Equifax will add the pay-in-4 data to credit reports beginning at the end of February. Both positive and negative information, on-time payments and defaults, will be included in reports and reflected in consumers’ credit scores, Equifax said.

Buy now, pay later plans are especially popular among people with limited credit histories who don’t qualify for credit cards or other traditional credit. These consumers, Equifax said, should get a boost from the plans’ inclusion on credit reports if they pay their bills on time.

People who have thin credit files or who have no more than two years of credit history saw an average FICO credit-score increase of 21 points, according to an Equifax study, compared with an average of 13 points for the typical borrower.

The credit report will include when the payment plan was opened, the scheduled payment the consumer has agreed to make and the actual payment that is made.

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