Pay-as-you-go (PAYG) systems may drive up average order volumes for merchants. To be 18% bigger, consumers who take advantage of these installment payments put purchases that are greater than those with other payment options, according to Adobe.
According to Forrester, CNBC identified two emerging companies in the installment payments space that have quickly gained a foothold in the US market. Since 2019, Affirm usage has more than doubled, while Afterpay usage in the United States has more than tripled, making them the most popular players thus far.
Affirm, founded by PayPal co-founder Max Levchin, has emerged as a standout choice for its point-of-sale loans.
Affirm enables customers to finance online purchases in monthly installments without incurring interest. For example, a person can pay $49 per month for 39 months on a $1,895 Peloton bike.
Morgan Stanley analyst James Faucette stated at the firm’s Tech, Media & Telecom conference in March that Affirm was “picking up merchants much faster” than some of the other “buy now, pay later” providers in a survey of the top 500 e-commerce merchants in the United States.
When an installment-payment provider assists a merchant in making a sale, the provider profits. It also earns interest on loans purchased from bank partners as well as some consumer loans. The interest rate it charges varies according to the creditworthiness of the consumer, but it frequently begins at 0%.
Affirm went public in January, with a share price of $49 per share. It is currently worth around $71 per share. Consider that the company began trading on the Nasdaq on January 13 at $90.90.
“We believe the ongoing rotation out of growth stocks, as well as the pending lock-up expiry (140M shares), will continue to be a source of near-term volatility for the stock,” Bank of America Securities analysts wrote in a March 25 note.
Nonetheless, the bank stated that Affirm is “well positioned to deliver 30%+ top-line growth for the next several years.”
“When you consider valuation here, it’s not surprising Affirm could get caught up in that broader drawdown,” Andrew Jeffrey, managing director at Truist Securities, said. He believes it will be a “volatile stock in valuation given the nature of the market,” but believes Affirm will be a standout in the [‘buy now, pay later’] space.
Afterpay is a payment processing service.
Afterpay, which was founded in 2014, is one of Australia’s hottest technology stocks. The company primarily trades in Australia, but it also trades over-the-counter in the United States.
According to FactSet, shares are down less than 1% for 2021 but up nearly 590% in the previous year.
The “buy now, pay later” payment platform is gaining traction in the United States. According to Forrester data, Afterpay usage in the United States has more than tripled since 2019. In 2018, the company entered the market.
Afterpay enables customers to spread the cost of their purchases over a series of interest-free installments. Instead of paying $98 upfront for a pair of Levi’s, a person can pay in four installments of $24.50.
In its most recent financial report, Afterpay stated that it had more than 8 million active customers in North America. Meanwhile, active customers in the United States increased by 20% from the previous quarter.
“We’ve seen very strong sustained growth in North America. “The United States was the largest contributor to underlying sales in Q2,” said co-CEO Nick Molnar on the company’s most recent earnings call.
In North America, Afterpay works with over 17,900 retailers, including Bed, Bath & Beyond, Lululemon, and Ulta, as well as a slew of smaller direct-to-consumer players.
The merchant fee charged by the payments platform generates revenue for the platform.
According to the company, merchant partners are paid the amount of each purchase (less the fee) up front. Afterpay assumes the risk of repayment and may charge late fees.
Don’t dismiss the competition.
“We expect the competitive intensity within the [‘buy now, pay later’] market to continue increasing, from pure-play BNPL providers (Afterpay, Klarna, Sezzle), PayPal, and traditional card issuers,” according to Bank of America Securities analysts.
Klarna, in particular, announced in early February that it had reached a record 15 million customers in the United States. Since October 2020, 1 million new customers from the United States have joined Klarna, which is aiming for a public listing in Europe.
According to Lily Varon, senior analyst at Forrester, PayPal is also one to watch because of its access to massive amounts of data.
Last September, the company announced its installment payment option. According to an Atlantic Equities research note, PayPal’s brand recognition may give it an advantage over competitors.
“PayPal has already seen a meaningful 10% increase in branded share of checkout when its installment product is presented upstream, so we see this as a $2 billion revenue opportunity,” the company said. “BNPL should contribute a few percentage points to PayPal’s revenue growth in the coming years.”
Traditional institutions are also getting involved in the space.
Visa and Mastercard announced partnerships with payment processors to create installment options, while American Express debuted its version of the service, dubbed “Plan It.”
Citi and JPMorgan Chase also provide comparable services.
The names that American consumers are already familiar with for payment processing and banking may also be the ones that convert them to this payment method.
“I do believe that customer expectations are shifting and that there is the potential for a permanent shift, but I’m not sure it will come from these fintech start-ups; my guess is that it will come from PayPal, card networks, and banks,” Varon said.