Krista Michels never tires of online services that allow American shoppers to pay for everything from Christmas gifts to free monthly bills, known as âbuy now, pay laterâ.
“I’m a little addicted now,” said the young mother from Washington state.
She first turned to these solutions offered at checkout or online to rebuild her credit rating, which was too low to access a traditional credit card.
Michels now uses them whenever possible – at the supermarket or to pay his internet bills.
Startups like Affirm, AfterPay, Klarna, and Sezzle typically allow consumers to pay for a purchase in four installments with no fees or interest, like a regular credit card, but without the associated paperwork and complexity of fees and interest payments.
They have also proven useful for consumers who do not have access to traditional credit, such as new immigrants to the United States.
But consumer advocates say they carry the same risks as credit cards, and buyers should be careful not to take on excessive debt and keep the different terms of services in mind.
âThe problem is, people could be overworked if they’re not careful,â said Chuck Bell, program director at Consumer Reports.
Don’t “go over your finances”
The concept of installment payments is not new to US commerce, but the disruption of the COVID-19 pandemic has spurred these new services as more and more shoppers shop online.
From chain stores to small online sites, retailers have organized partnerships to bring such payment services to customers and help them afford what they typically couldn’t, while financial institutions from Mastercard to Goldman Sachs seek to offer theirs.
According to a study by consulting firm McKinsey, these payment solutions accounted for 6% of unsecured loans in the United States in 2016, 9% in 2020 and are expected to increase to 13% in 2023.
“It’s convenient, it saves consumers money due to lower interest charges and it’s disruptive,” said Kenneth Leon, banking specialist at CFRA.
Big business agrees: Australian AfterPay was bought by Square for $ 29 billion this summer and Affirm is valued at $ 37 billion on Wall Street.
Regulators have taken note of their success, with the Consumer Financial Protection Bureau over the summer warning consumers to be careful and not to “go overboard” when it comes to these products. At the same time, officials said current business regulations are sufficient.
Michels, the Washington state buyer, admits the risk is there. She has never missed a payment on anything she bought, but she spends more than she usually would.
âIt’s almost like a game. What can I do to increase my limit? She told Agence France-Presse (AFP).
The plethora of offers with different terms has consumer advocates fearful that buyers will find themselves in arrears.
âThe rules and practices of each of these companies may be different,â said Bell of Consumer Reports, noting that many of the users of these services are young and low-income.
Affirm does not charge late fees, but does charge interest on certain transactions. Afterpay charges late payment penalties, but never more than 25% of the original purchase, while Sezgle allows its customers to reschedule one payment per order.
Some startups work with credit rating agencies, but others don’t.
All say they won’t give customers new loans unless they’re up to date with their payments, but there’s nothing stopping consumers from looking for credit elsewhere.
Another concern is that getting refunds is more complicated when returning an item paid for with one of these services.
Lauren Saunders, associate director at the National Consumer Law Center, said these products are not fundamentally different from traditional credit.
âEven with shiny fintech clothes, new credit products need basic consumer protections for credit to ensure that it is affordable, accountable, transparent and fair,â she said in a statement. hearing in Congress earlier this month.