Buy Now, Pay Later Plans Help Reduce Online Cart Abandonment : NPR

A payment option called buy now, pay later is gaining popularity. Although these services offer consumers a convenient form of interest-free installment credit, they have raised concerns among regulators.



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If you’ve shopped online recently, you might have noticed a new type of payment option available. It’s called buy now, pay later. And the basic model, offered by companies like Afterpay and Klarna, allows customers to buy what they want immediately and pay for it later in four interest-free installments. Alexi Horowitz-Ghazi from our Planet Money podcast explains the potential pros and cons.

ALEXI HOROWITZ-GHAZI, BYLINE: When you use buy now, pay later, you’re basically taking out a small loan. It’s a bit like paying with a credit card.

TERRI BRADFORD: The difference is that you don’t pay interest. It’s almost too good to be true.

HOROWITZ-GHAZI: Terri Bradford is a payments specialist at the Kansas City Fed. And she says buy now, pay later, that’s too good to be true, because as long as you’re able to get past a low enough bar, like a soft credit check that won’t show up on your credit score, these companies will charge you money for anything you buy. Then they will withdraw in four installments from the bank account or debit or credit card of your choice. And it’s all pointless, which raises a pretty big question.

BRADFORD: Interest-free loans. Where is the value proposition in that? So where did the money come from, right?

HOROWITZ-GHAZI: That’s true. Lending money is usually profitable due to a combination of interest and fees. But Terri and her research partner, Julian Alcazar, found that the fees for this model aren’t usually high either.

JULIAN ALCAZAR: I always expected that sting moment. You know, when you watch a horror movie and you can hear the suspenseful music and there’s Michael Myers behind the door, that’s what I expected.

HOROWITZ-GHAZI: It turns out that instead of scamming their customers with hidden fees, buy now, pay later, companies take their cut on the other side of the transaction by charging the companies that actually sell the goods. It costs them between 4 and 9 1/2% per sale. Credit card companies typically charge 2-4% less, which raises another question: why are more and more retailers opting to buy now, pay later?

BRADFORD: Yeah, that doesn’t quite seem to fit, does it?

HOROWITZ-GHAZI: What makes it jive (ph) is that buy now pay later helps businesses sell more stuff because it helps them reach people who don’t typically buy on credit, people with bad credit or young customers. On top of that, says Julian, buy now, pay later helps retailers deal with a problem they call cart abandonment, when people fill their carts, but then head to checkout. …

ALCAZAR: They’ll be like, I don’t need to spend $200. What is buy now, pay later – this actually reduces cart abandonment because large purchases feel smaller to the consumer.

HOROWITZ-GHAZI: Which can be dangerous. Amelia Schmarzo experienced this a few years ago when she started shopping for clothes online using buy now, pay later.

AMELIA SCHMARZO: It literally made the price, like – I’m not kidding – like, $8. So in that mindset, I was like, oh, my God, I can afford the world.

HOROWITZ-GHAZI: Amelia fell into a sort of shopping spiral. Before, his credit card statement had never been more than a few hundred dollars at most. But when she got the bill that month…

SCHMARZO: I saw it was $2,000, which was my limit. And then I saw that my debit card went from $700 to $20. And that’s when I said to myself, I’m going to throw up.

HOROWITZ-GHAZI: Stories like Amelia’s are part of why regulators, like the Consumer Financial Protection Bureau, are currently studying how these services fit into existing credit regulations and mapping the risks that they can pose to people who use them. Alexi Horowitz-Ghazi, NPR News.

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