The Rise of Installment Payment Systems

“Buy Now, Pay Later” Systems Gain Popularity

Companies are developing systems that allow consumers to pay for products in smaller monthly installments. These “buy now, pay later,” offerings have been available for big-ticket purchases, like furniture, for some time, but they are now becoming more popular for smaller items purchased online, from hair products to video game consoles.

According to a recent survey, over one third of consumers in the US have made purchases using an incremental payment system. Most respondents to the survey said they chose to do this as a way to avoid credit card interest or to purchase something outside their budget. These payment methods are particularly popular among young adults who tend to have less money saved up for large purchases.

Banks, Companies, and Fintechs Get on Board

Online shopping companies, fintechs, and banks are watching the rise of “pay later” programs, and are finding ways to get involved.

Last week, Microsoft (MSFT) announced that consumers will be able to pay for the new $499 Xbox in monthly installments. This was set up through a partnership with Citizens Bank (CFG) in the US and with fintech startup Klarna in the UK. PayPal (PYPL), MasterCard (MA), Fiserv (FISV), and other companies have also recently rolled out new installment payment offerings.

Affirm is one of the fastest-growing startups in the installment payment sphere. It partnered with over 6,000 companies including Peloton (PTON) and Walmart (WMT). It also recently announced that it will work with Shopify (SHOP). The company’s customer base grew from 3 million in November 2019 to over 5.6 million in July 2020, and it is reportedly considering an IPO.

Reading the Fine Print

Though installment payments can be a helpful way to make a big purchase little by little, it’s important for people buying products through installments to be sure they are aware of what they are signing up for.

Some of these payment plans charge interest payments, late fees, and interest on late fees. Additionally, these programs do not help people build credit because most of them do not report to credit bureaus. It’s likely that installment payments will become increasingly common. Like with any financial agreement, it’s important to do a little research before committing.

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