Live now, pay later is fintech’s latest extension

Buy now, pay later is taking its millennial attitude up a notch. To keep consumers hooked on this newfangled instalment financing, companies from Sweden’s $46 billion Klarna to Australia’s Afterpay, soon to be part of Block, are extending their services beyond shopping to recurring payments like doctor visits and taxes. That adds to the risk of debt piling up. Call it “live now, look out later.”

BNPL took off at e-commerce sites where younger people purchase smaller-ticket items - say an outfit for a Friday night - without paying in full. Shoppers set pay-off dates for the loan without compound interest payments. It became one of the hottest trends in consumer finance.

A Momentive poll in August showed 20% of Americans used such services over the previous year. In 2020, when shopping went mostly online thanks to Covid-19, lending volume in the United States alone rose 10-fold to $39 billion annually, according to Mercator.

But the pandemic boost could be short-lived. Morgan Stanley analysts expect growth of gross merchandise value in Europe to slow from about 90% in the year to June to 22% annually up to 2024. Competition is heating up as PayPal and banks jump in. There are also fears that as millennials age and become more financially secure they will move to credit cards, which provide higher loan balances and perquisites.

To stay competitive, pay-later providers are going beyond their comfort zones in fashion and beauty. Featherpay is facilitating healthcare providers to offer longer-term instalment options. Wisetack is helping consumers pay for home and auto repairs. Klarna acquired Inspirock, a travel planning app.

Goldman Sachs-backed Zilch, worth some $2 billion, is charging UK consumers a fixed fee of about 2 pounds to pay anywhere – not just one retailer’s website. Customers can use the virtual Zilch card for groceries, utility bills, even taxes. Klarna, Affirm and Zip are offering similar features. Afterpay is providing instalment as a form of subscription payments.

The business model hasn’t been tested by a financial downturn where consumer defaults rise. With interest rates still close to zero, for now there’s limited financing cost in providing goods virtually for free. But that won’t last. As money becomes more expensive, pay-later providers jockey to offer more products and credit losses go up, shareholders need to brace for a bumpier ride ahead.