By Peter Rudegeair
The holiday season is almost over, but for many gift-givers, the
tab won't come due until well into 2021.
Millions of U.S. consumers, looking to stretch their dollars and
avoid taking on new credit-card debt during the coronavirus
pandemic, flocked in recent months to "buy now, pay later" offers
from financial-technology companies including Affirm Holdings Inc.,
Afterpay Ltd. and Klarna Bank AB.
In November, the cumulative number of U.S. shoppers that had
opened an Afterpay account exceeded 13 million, and 7.5 million of
them had made a purchase using Afterpay in the previous 12 months.
Also in November, purchase volume among Afterpay's U.S. users
reached more than 1 billion Australian dollars, equivalent to more
than $770 million and roughly triple the level a year earlier.
(Afterpay is based in Australia and reports its figures in the
local currency.) Klarna had counted 11 million total U.S. users as
of October, two million of which used the Klarna app in the
preceding month. The number of annually active Affirm users reached
3.9 million as of Sept. 30, up 63% from a year earlier.
"You think of the Zooms of the world, for example, the delivery
services of the world -- some businesses were really lucky to do
well during Covid, and I think we were one of those really
fortunate businesses," said David Sykes, the head of Klarna's U.S.
Investors are taking notice. The price of shares in Afterpay,
which trade in Australia and the U.S., has quadrupled since the
start of 2020. Affirm filed paperwork last month with the
Securities and Exchange Commission for an initial public offering
that could value the San Francisco startup at as much as $10
billion, The Wall Street Journal previously reported. Klarna
recently became one of Europe's most valuable privately held tech
companies after a fundraising round pegged the worth of the Swedish
company at $10.65 billion.
"Buy now, pay later" applies to a variety of payment plans, but
among the most common is an option to split the cost of a small to
midsize online purchase into four equal installments over the
course of a few weeks or months, interest-free.
Shoppers are attracted to fixed payment schedules and simplified
checkout processes, according to consumer surveys. Some providers,
such as Affirm, structure these offers as zero-interest loans,
which involve credit checks. Others, including Afterpay, consider
their services not to be loans but instead regard them as sales
contracts to which some state and federal consumer-credit rules
Purchases made on buy-now-pay-later plans are accelerating as
banks' credit-card balances have fallen and their credit-card
spending volumes are just starting to rebound to pre-pandemic
levels. Consumers' reluctance to take on new revolving debt during
economic uncertainty, and the move by banks to toughen approval
standards, are among the reasons for the decline in card volumes,
bank executives have said.
In the absence of interest income, buy-now-pay-later companies
make the bulk of their revenue from fees they charge to merchants,
though some also charge consumers fees for late payments. Merchant
fees can range from 2.5% to 4% of the purchase price, according to
analysts at Bank of America, and can sometimes be higher.
At Affirm, which finances products including Peloton Interactive
Inc.'s stationary bikes, merchant-network revenue in the three
months ended Sept. 30 was $93.3 million, or about 6% of Affirm's
$1.48 billion in gross merchandise volume during that period.
For merchants, such costs are often worth it because Affirm,
Afterpay and Klarna can encourage younger, debt-averse consumers to
complete a sale and increase the amounts they are willing to spend.
The companies also help drive online sales after the pandemic
caused foot traffic at physical outposts to drop. Macy's Inc., Foot
Locker Inc. and thousands of other merchants have added these
payment options in recent months.
"Now, if you don't have a solution like ours, you're almost at a
competitive disadvantage," said Klarna's Mr. Sykes.
Foot Locker introduced Klarna as a payment option on its North
American websites in October. It quickly became one of the top
three ways shoppers were paying for their sporting-good purchases,
with more than 2,000 orders a day, Foot Locker Chief Executive
Richard Johnson said on a conference call in November.
Klarna has driven a 25% increase in the average order value for
customers of the fashion retailer Express Inc. who use that option
to pay since it was made available in September, Express Chief
Executive Timothy Baxter said on an earnings conference call in
"It's just another way to offer customers, particularly in the
economic situation that we're in right now, flexibility," Mr.
Baxter told investors shortly after the Klarna partnership went
The newfound popularity of buy-now-pay-later offers is leading
regulators to pay closer attention to the offerings.
In March, California's Department of Business Oversight
announced it had reached a roughly $1 million settlement with
Afterpay to resolve findings that the company structured its
product to "evade otherwise applicable consumer protections" and
was making loans to California residents without a valid license.
An Afterpay spokeswoman said the company was pleased to have the
"clarity and pathway for business certainty in the market."
Just before Christmas, the U.K.'s advertising regulator faulted
Klarna for commissioning social-media posts by influencers that
appeared to encourage consumers to use the service on purchases of
beauty and skin-care products to improve their moods.
Klarna said in a blog post that those ads had been an attempt to
recognize the mood of its users during the U.K.'s first lockdown.
"We acknowledge that, whilst we had the best of intentions, we
missed the mark," the company said.
Write to Peter Rudegeair at Peter.Rudegeair@wsj.com
(END) Dow Jones Newswires
December 30, 2020 10:14 ET (15:14 GMT)
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