Consumers are flocking to buy-now, pay-later offers as online shopping surges in response to the pandemic.
Take Emmanuelly Alvarado's purchase of about $20 of Pica-Pica candy a month ago. As she clicked her way to the checkout button, an offer caught her eye: Instead of paying for the chamoy-flavored Mexican treats all at once, she could open an account with Afterpay Ltd. and finance it in four equal installments. After taxes and shipping, the company would automatically deduct about $6 from her account every two weeks.
"It wasn't that expensive, but when I saw the $6, I said, 'Oh that's beautiful,'" said Alvarado, 27, who's studying early childhood education at Bronx Community College in New York City.
Since loading up on candy, Alvarado has used Afterpay to finance clothing she bought at retailers including Shein and Teen Hearts. As long as she pays on time, Alvarado won't incur financing charges or fees. Instead, Afterpay makes most of its money on a fee it collects from merchants.
Soaring unemployment has left struggling consumers looking for ways to pay without busting their budgets. That -- along with the fact that the coronavirus pandemic has pushed many shoppers online -- has prompted a surge in interest in options that let consumers split up their purchases into smaller payments.
The trend is hard to miss. Afterpay and its rivals -- brands like Klarna and Sezzle and Quadpay -- are now featured across thousands of merchants' websites, with small ads popping up as consumers check out, encouraging them to pay off their purchases in installments.
And on social media, retailers who haven't bought into the craze face a cacophony of consumers' tweets and messages, begging for the option to be added ahead of big product launches such as Apple's iPhones, Sony's new PlayStation or Kylie Jenner's cosmetics lines.
"The ability for these platforms to seamlessly integrate with merchants, and bring eyeballs to the site, is critically important for merchants," said Ralph Andretta, chief executive officer of credit-card company Alliance Data Systems Corp., which recently agreed to pay $450 million for Bread, another buy-now-pay-later option. "They're excited about the opportunity for more volume and bigger baskets, and I think that's why they're willing to endure the spread on these types of transactions."
Think of it like a reverse layaway. Consumers get their purchase instantly, even if they elect to pay it off over time. Klarna said 1 million people in the U.S. have tried its services in the last three weeks alone, bringing its total for the region to 11 million customers. Afterpay has said more than half its 11.2 million active customers are in the U.S.
For much of the rest of the world, the buy-now-pay-later craze is nothing new -- consumers in Latin America, Europe and Australia have long been able to split their purchases into smaller payments with these services.
The movement has left banks puzzled. Young people haven't been drawn to credit cards in the same way their parents or grandparents were. Many are saddled with student loans and other forms of debt, leading them to favor debit cards that draw directly from their cash on hand for everyday spending.
Afterpay and its rivals play into that trend, and about 85% of the transactions on Afterpay's network are tied to a debit card.
"Traditionally, America has been addicted to credit, but that's changing," said Nick Molnar, who helped found Afterpay in 2014 and now serves as co-CEO. "You're seeing a shift distinctly to debit. And a shift to debit with Afterpay."
In most cases, Afterpay and Klarna don't charge interest or fees as long as users keep up with their payments. Instead, merchants give the apps a cut of each sale, which can amount to 6%.
"Young people just seem to be more skeptical of traditional financial products, even credit cards," said David Sykes, head of Klarna's U.S. operations. "Because of that, they're looking for substitutes to manage cash flow and budget."
Banks, for their part, haven't been sitting still. Lenders including American Express Co., JPMorgan Chase & Co. and Citigroup Inc. have all started giving cardholders the ability to split up large purchases into smaller installments, but those options usually carry a fee. AmEx has said cardholders have utilized the offering 5 million times, for a total of $4 billion in purchases.
The trend has started to catch the eye of regulators. The California Department of Business Oversight earlier this year announced settlements with Quadpay, Sezzle and Afterpay in which the three agreed to refund a total of roughly $1.9 million in fees to consumers after complaints they didn't have the proper licenses.
Afterpay this month said it's also engaging with state regulators across the U.S. to make sure its licenses align with their individual requirements.
"It's very clear people know how much they're going to be paying," said Lauren Saunders, associate director of the National Consumer Law Center, which advocates for privacy and other consumer protections. Still, she said, "it does seem that they get some chunk of revenue from late fees. And to the extent that interest costs are really hidden in late fees, that's potentially concerning."
For consumers, the bigger concern is getting swept up in the craze. TaKara "Harley" Archie, a 32-year-old mother of two, recently had to go to her fiance for help making a $40 payment to Afterpay after she took out too many plans at once.
"I did realize that maybe I need to chill out," Archie said. "It got a little bit too good to me."