Installment payment plans are back in fashion. PayPal Holdings Inc. said last week it was buying Japanese installment company 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 the time of payment in the past. year. Even Inc. is doing it.

One reason: shoppers like Ms. Luedtke who don’t qualify for credit cards. Businesses that buy now, pay later say they rely less on traditional credit scores and reports and, in some cases, bypass it altogether. Doing so allows them to approve more consumers. Shoppers get the ability to buy things even without cash on hand, which translates to higher sales for retailers.

Afterpay said it expects the company’s US merchants to see an $ 8.2 billion increase in sales this year due to payment plans. Affirm Holdings Inc. said last year that 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 in a recent earnings call. Klarna is also helping the retailer attract younger customers, he said.

“The value that most retailers see in buying now, paying later is customer acquisition,” said David Sykes, Klarna’s director of North America.

Ms. Luedtke, 26, has credit cards now, but still prefers installment plans. Last month, she used them to buy about $ 40 worth of skincare products from Peter Thomas Roth and $ 65 worth of clothing from Shein.

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

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

Interest rates and other terms vary by payment plan provider. Affirm’s interest rates range from 0% to 30%, and about 43% of its transactions during its last fiscal year did not charge any interest. The company does not charge late fees. Afterpay does not charge interest, but does charge late fees.

Merchants don’t take any credit risk with these plans, but the fees they incur can be higher than credit card purchases, often between 3% and 5% of the purchase price, according to people familiar with the topic.

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

Affirm said it had a 1% net cancellation rate in the quarter ending June 30, down from 2% a year earlier. Afterpay said it canceled 0.6% of the total dollars it processed in payments during the company’s fiscal year ending June 30, up from 0.4% the previous year.

By working with a network of retailers, companies that buy now and pay later can create autonomous payment ecosystems. They take payment behavior into account in future underwriting decisions. Customers who pay late or don’t pay at all risk losing their installment payment option at other participating retailers.

“Most merchants want a partner that has a real edge and real underwriting ability,” said Affirm CEO Max Levchin. “These are not deeper approvals, but they are different approvals.”

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

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

The desire to boost loan approvals was one of the reasons Walmart in 2018 decided to end its decades-long 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 everyone,” said Julia Unger, vice president of financial services at Walmart.

Some banks now offer installment payment options on their credit cards. Citigroup Inc. saw a seven-fold increase in the dollar amount of credit card purchases converted to installment loans in July compared to the same month last year, said Gonzalo Luchetti, director of the US consumer bank of Citigroup.

Synchrony, the largest US store credit card issuer, will launch a buy now, pay later plan in October. Capital One will test 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 to their credit cards, according to people familiar with the matter. Visa Inc. said it has been testing ways for shoppers to check if they qualify for payment plans when they enter their card numbers at checkout.

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