Another trend toward the digitalization of financial services can be found by what is known as “buy-now, pay-later” firms, the most well-known of which is Australian fintech company Afterpay. This model competing with traditional bank and credit card “lending” allows consumers to pay over time, without revolving debt, interest payments or other fees. Average outstanding balances on Afterpay is typically much smaller than on a credit card, about $218 versus $3,260 for credit cards.
Founded in 2014, the company went public just two years later. It now has 4.6 million active customers, with an on-boarding rate of 12,500 new customers daily. The company entered the U.S. market in the first half of 2018, and its annual report said growth in the U.S. (and the UK) was “exceeding expectations and major new merchants continue to onboard.” Annual U.S. sales were close to $1 billion in its first year of operations, with an expected run rate exceeding $1.7 billion, representing an already substantial percentage of overall sales.
According to Afterpay, its primary target markets are millennials and Gen Z, which are “driving change in global spending habits which is meaningful today and will be even more meaningful in 10 years.” And that “Afterpay is uniquely positioned to benefit from this shift.”
More and more retailers have partnered with Afterpay, particularly fashion and beauty companies, including Amazon, Lululemon, Sephora, Forever 21, Free People, just to name a few, all with strong brand appeal for the millennial and Gen Z consumer. Major card companies are entering the buy-now, pay-later arena, and Afterpay has partnered with VISA to provide its services to VISA card holders (up to a set dollar cap).
While companies such as Afterpay are revolutionizing the consumer debt space, there are some caveats. Although there are no fees as long as you pay on time, if you are late or miss a payment there are late fees, according to an algorithm which ensures that late fees are “never more” than 25% of your purchase or $68, whichever is less. There is no credit check necessary to apply for Afterpay, leading to questions whether the company is facilitating debt for individuals who may not “qualify.” In addition, missing payments can affect your credit score if Afterpay chooses to report your missed payments to credit scoring agencies, which it reserves the right to do, if you read the fine print.
Despite these concerns, it appears that Afterpay, and other firms offering these services, are permanently disrupting the consumer lending horizon as we know it.