The buy now, pay later wave: Klarna, Affirm and rivals hope to take U.S. by storm


A new form of digital layaway has taken Europe by storm and found some acceptance in the U.S., and the growing handful of rivals in the space are looking to spur more online purchases that Americans pay for over time.

“Buy now, pay later” options — referred to in the payments industry as BNPL — offer a twist on the concept of layaway, allowing consumers to split purchases into installments and charging them either simple interest or no interest at all, in a break from the traditional credit model that lets interest compound. Unlike with traditional layaway, consumers receive instant access to their purchase as they pay it off.

Furniture companies have long let people pay for big-ticket items in installments while taking the product home right away, but now the concept has made its way online, spreading across industries and into smaller purchase amounts, JMP Securities analyst David Scharf noted. Those looking to build fancy home gyms during the pandemic could split the cost of an $1,800-plus Peloton Interactive Inc.
bike into 39 interest-free monthly payments of $49 using financing from Affirm Holdings Inc.
A host of other players have been rushing to stake their claims elsewhere in the U.S. retail market.

The services are seeing surging adoption, driven by growing merchant acceptance, booming e-commerce sales, and what many providers say is a skepticism among younger shoppers about traditional credit offerings. Though BNPL services accounted for just 2% of U.S. e-commerce payments last year according to FIS Global, they’re rapidly gaining in popularity. The value of purchases made using BNPL offerings rose 132% in the first quarter, per data from

BNPL services are more prevalent overseas, accounting for more than 7% of European e-commerce transactions in 2020 and 10% of Australian ones, according to FIS Global. In Sweden, home to BNPL provider Klarna, installments accounted for 23% of e-commerce transactions last year.

The installment wave has drawn the interest of established giants like Visa Inc.
and PayPal Holdings Inc.
as well as a host of newer fintech players that have carved out different paths as they seek to stake their claims in the nascent U.S. market.

The trend is of growing relevance to investors. U.S. startup Affirm recently went public, while Australia’s Afterpay Ltd.
which trades in its home country, is contemplating a U.S. listing given the growing importance of the U.S. market to its business. Sweden’s Klarna is considering an IPO in the U.K., according to Bloomberg, though its chief executive has expressed some concerns about potential regulations.

Affirm IPO: 5 things to know about the fintech company shaking up online credit

In the credit-card model, merchants pay transaction fees when they accept card payments and consumers pay accrued interest if they carry a balance. BNPL services, which can sometimes be interest-free to the consumer, charge a steeper fee to merchants, who’ve been increasingly willing to pay up for the services so that consumers will be more inclined to go through with an online purchase.

BNPL sits amid a number of attractive industry trends, according to Jefferies analyst John Hecht, who sees a $600 billion total transaction opportunity for the industry in the U.S., based on the value of e-commerce purchases made outside of Inc.
He expects that the services could take a bite out of what he views as an $840 billion dollar total addressable market for fintech-enabled credit products.

While BNPL offerings are structured differently than traditional credit, they aren’t without risk. The various BNPL companies have different policies about missed payments, but some will charge late fees or report to the credit bureaus about failures to make good on payment commitments. The industry is largely unregulated and there are concerns that consumers could end up taking on more installment commitments than they can afford to pay back in the allotted timeframes, especially in a credit crunch.

The companies have different approaches to the U.S. as they try to build or expand their BNPL businesses. Crumpe spoke to executives at some of the leading offerings to find out their strategies for the market.


While Peloton is Affirm’s largest customer, the BNPL company has been expanding its merchant mix, which doubled from a year earlier in the latest quarter to reach almost 12,000 retailers.

One move to diversify the company’s merchant base is a recent arrangement with Shopify Inc.
that makes it easy for the e-commerce company’s merchants to enable Affirm’s installment offerings. In exchange, Shopify got equity interest in Affirm.

“Because of the nature of the relationship, they have every incentive in the world to make sure it’s successful,” Chief Executive Michael Linford said. He expects that the deal “will add substantially more value to us than we had to give up” since Shopify’s vast merchant base is “really difficult if not impossible to build.”

Affirm offers a mix of simple-interest and interest-free installment options, and Linford said that the company is particularly differentiated in its work with high-value purchases as its tech and risk-management capabilities enable it to “create a lot of value for merchants.” Affirm’s underwriting determines which customers would be capable of making their installment payments on big-ticket items.

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At the same time, Affirm sees value in helping to facilitate ordinary spending as well, and it recently announced a debit card that will let people buy things and split them after the fact using their cards.

The company doesn’t charge late fees for customers who miss payments, according to Linford. For customers who ultimately fail to make good on smaller-value payments, the company may lock down access to the Affirm network going forward. Those who don’t pay up for bigger-ticket items could be reported to a credit bureau.

About 30% of Affirm transactions originate from within the company’s “properties”—mainly its mobile app—rather than from merchants’ own sites. The app is “really, really powerful for re-engagement” of users, Linford said, and merchants can pay to show new products or offers on the platform.

As e-commerce booms, there’s a “quite aggressive fight to get any sort of mindshare,” Linford said, and he argued that the platform holds appeal with brands looking to reach younger-generation consumers who have “high intent and capacity to purchase.”

Because the company enables shopping from within its app, its customers can split purchases even from merchants that don’t list Affirm as payment options on their own websites. There’s no Affirm button on Amazon’s traditional website, for instance, but the e-commerce giant is one of the largest merchants within the Affirm app, Linford said. Affirm uses virtual cards to split customers’ Amazon purchases on the back end.


After helping to kick off the BNPL trend in Australia, Afterpay came to the U.S. market less than three years ago with a focus on interest-free offerings.

Afterpay is “not trying to upsell someone credit,” Co-Chief Executive Nick Molnar told Crumpe, and the company has been “purposefully focused on the couple-hundred-dollar purchase” thus far.

The company charges a late fee after an initial grace period for consumers who fall behind on payments, and it cuts customers off from making future purchases until they pay back what they owe.

“Unlike a finance company that wants you to be late…with Afterpay you can’t keep shopping” after missing a payment, Molnar said. That dynamic fosters a better relationship with customers, in his view.

Read: What booming debit card spending means for the payments industry

Afterpay’s North America merchant base grew more than 150% in the latest quarter relative to a year earlier. In the U.S., underlying sales, or the value of items purchased through its service, increased 211%.

The company now works with 23,000 retail brands in the U.S. including Bed Bath & Beyond Inc.
and Lululemon Athletica Inc.
A recent partnership with Stripe made it easy for that company’s merchants to easily activate Afterpay as a checkout option.

The company may process 10% to 30% of transactions for its retail partners once enabled as a payment option, Molnar said.

Afterpay is building a presence beyond the checkout button, with 17% of purchases globally during the month of February originating from Shop Directory, meaning that these customers are locating merchants through Afterpay’s app or site.

While Afterpay is relatively new in the U.S., its success in Australia “puts into perspective where Afterpay can expand as a business,” Molnar said. In Australia, 25% of volume comes from in-store purchases, and consumers can pay for things like dentist visits using the service.

The company is also launching its own consumer savings accounts in Australia, something that could help the company deepen its customer relationships and cut back on credit-card processing fees if consumers opted to fund purchases with their Afterpay bank accounts.


With a name that’s a play off the Swedish word for “clear,” Klarna is looking to make its mark in the U.S. after seeing success in Europe with what it says is a more clear and transparent approach to offering credit.

The company’s mission is “not to be at checkout of every single website like PayPal” but rather to “be at the intersection of payments, shopping, and banking,” according to David Skyes, the head of the company’s U.S. business.

For Klarna, that means engaging customers beyond the point of purchase, allowing them to track their packages within the Klarna app, where they may also be tempted to view items from other retailers, add products to their wish lists, or even deposit money with the company at a “slightly higher interest rate,” Sykes said.   

See also: The fight to shave milliseconds off your purchases

Like Affirm, Klarna offers shopping from within its own app-based browser, also allowing customers to make purchases from retailers like Amazon. “The biggest challenge is that a customer discovers you on Sephora and then they go to Amazon and you’re not there,” Sykes said, but the in-app browser lets consumers “shop anywhere” without worrying about the behind-the-scenes work that enables Klarna to split these payments.

Klarna’s app launched about a year ago in the U.S., where it now has 3.5 million monthly active users.

Customers tend to use their debit cards for purchases with BNPL services, but Sykes acknowledges that debit cards “aren’t that great of a product.” For one, shoppers don’t get rewards points with typical debit-card use, the way they would when shopping with their credit cards, so Klarna launched its own loyalty program to offer some perks for BNPL shopping. The program is “growing ferociously fast,” he said.

Klarna’s most popular product is an interest-free pay-in-four installment offering, with average order values of $140 to $150 across North America. The company also offers a pay-in-30 option that lets consumers pay 30 days after delivery of an item, so that they can try it and decide if they want to return it.

The company charges a $7 late fee for missed payments, but a spokeswoman said that Klarna doesn’t report to the credit bureaus for the Pay in 4 and Pay in 30 offerings.


PayPal is no stranger to letting customers pay over time, having acquired Bill Me Later, an early online-credit service, more than a decade ago while still under the eBay Inc.

The company has since ventured into the BNPL universe, introducing its Pay In Four product for U.S. users last summer and letting them make four interest-free payments over six weeks. PayPal had a key advantage in its rollout, as it was able to offer the feature to its millions of existing merchants and at no extra cost beyond what those merchants ordinarily pay for the company’s payment-processing functions.

The company’s deep merchant relationships make it so the company is “the only virtually ubiquitous option,” said Greg Lisiewski, the vice president of PayPal’s global pay-later products. (Morgan Stanley analysts have calculated that PayPal is accepted by about 80% of the top 500 U.S. internet retailers.)

For more: Here’s how PayPal hopes to turn Venmo into the next PayPal

Merchants using Pay In Four have seen a 39% lift in average order value relative to standard PayPal usage, Lisiewski said. He argued that PayPal has a “significant underwriting advantage” because of its industry history and data on consumers’ payment patterns.

Lisiewski, who came to PayPal through the Bill Me Later acquisition, expects that BNPL products will exist in concert with more traditional credit offerings. Despite talk of millennial skepticism toward traditional credit, PayPal’s research in conjunction with industry-publication found that almost 90% of the generation had credit cards.

“I think there’s going to be room for all of it,” he said, with BNPL proving useful for smaller and medium purchases and more traditional credit offerings serving higher-value purchases.


While the BNPL industry features players that are looking to boost their own brand value through apps and loyalty programs, travel-focused Uplift sees value in working more behind-the-scenes.

“If you’re making the payment brand primary and having them take customers and remarket them, that’s a bad trade for big enterprise brands,” Chief Executive Brian Barth said. “If you want to use Uplift on United, you go to the United app.”

Uplift, which works with travel companies like Carnival Corp.
and recently signed a partnership with Southwest Airlines Co.
helps consumers finance leisure purchases from $100 flights to $25,000 cruises using both simple-interest and interest-free offerings.

The privately held company had a “record” month in March, even though cruise lines can’t yet sail, and it’s “bracing for steady growth” now that the travel corridors are reopening, according to Barth.


Visa makes money when people use installment-payment offerings with their Visa debit or credit cards, but the company is also testing out a way to become involved in BNPL more directly. The card giant has a U.S. pilot program with Commerce Bank through which consumers using debit and credit cards issued by the bank will be able to see installment options on merchant sites where the technology is enabled.

“We’re trying to take the already approved issuer credit lines into installment payment options,” Mary Kay Bowman, Visa’s global head of seller solutions, told Crumpe. People would pay off their installments using debit but leverage their existing lines of credit with the bank.

See also: Visa sees ‘massive’ digital acceleration as millions try e-commerce for the first time

The pilot is focused on Commerce Bank in the U.S., but Visa has seen success with similar efforts overseas and it’s more broadly been enabling installment payments for decades. Brazil has been an early adopter of split payments, and half of Visa’s credit purchase volume in the country comes from installment payments whether on payment terminals or online, Bowman said. Installments are also popular in Mexico and Turkey, she added.

A crowded field of potential rivals

The BNPL market has become crowded in the U.S., with companies like QuadPay, now part of Australia’s Zip Co. Ltd.
also in the mix, in addition to more traditional financial companies. American Express Co.
has a feature called Plan It that lets cardholders put up to 10 large purchases in a “plan” and then pay for that over time alongside a fixed monthly fee. Chase
also has a feature that lets customers pay for $100+ purchases over time with a monthly fee.




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