Buy now, pay later: New way to pay for holidays

Holiday shoppers looking for a new way to delay paying for their purchases now have a new option. "Buy now, pay later" allows buyers to put off paying for their purchases or spread out the payments over a longer period of time.In the past, shoppers often took advantage of layaway plans to reserve holiday gifts and pay for the purchases over time. But retailers, including Walmart, have replaced layaway with a buy now, pay later payment plan.Buy-now, pay-later is notably common among Generation Z and millennials who can be suspicious of credit cards. They tend to favor less expensive, easier to understand payment plans with marginal credit checks and no interest to pay.Affirm, Afterpay and Klarna are three major firms offering these services to retailers that also include Macy's and Amazon. The goal for retailers is to increase sales. Studies show that this point-of-sale loan method increases retail conversion rates by as much as 20-30%. It also increases the average sale by 30% and 50%. Conversions are when a customer who otherwise might have passed on making a purchase decides to buy the product when they decide they can afford the lower payment spread over the next few months. Installment payments give consumers options and convenience when it comes to managing budgets and purchasing.The companies implementing these plans have some differences in what they do for customers who use them. All have some versions of spreading out an equal number of payments over a relatively short period of time. They typically have no hidden fees and are often interest-free.Ralph Smothers, owner of Ralph's Joy of Living in Tiffin said most of his customers use a "Ralph's Card," backed by CITI Financial and Synchrony. "Our customers can get 12 months with equal monthly payments at 0% interest with no down payment year round plus they can prepay at any time with no penalties."Smothers also has a lease to own option for customers who prefer that to adding to their personal debt. "If you have the ability to pay off your purchase in 90 days this is an awesome choice and would only cost the customer $50 in processing fees."Buy now, pay later plans have higher transaction fees for retailers than they pay to accept credit cards. Customers pay substantial late fees if they fall behind. Customers who fail to make payments on time will have their cases sent to a credit bureau or collection agency. This is the same as what happens if someone falls behind in payments on a regular credit card.Retailers are willing to pay those additional fees for the significant increases in sales. The buy now, pay later companies collect those fees and will also make money on late payments. They are also taking advantage of lower interest rates on the loans they are providing to customers using their services. This business model could change if interest rates increase. Consumers whose credit may not qualify them for credit cards are often qualified to buy a product on a buy now, pay later plan. The consumer is only paying the amount for one product and the product itself is collateral for the loan the customer is taking out on the product.Banks that issue debit cards see buy now, pay later as competition for how people pay for retail purchases. As much as 75% of retail transactions are paid for by debit cards. Some of these banks are exploring their own versions of buy now, pay later. Dr. Haan is Professor of Marketing & Entrepreneurship at Tiffin University. He can be reached at haanpc@tiffin.edu.