Pay Later Programs Make a Digital Comeback
While the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 may have slowed down credit card companies from marketing to college students, that doesn’t mean that college students stopped shopping — they just found a different way to do it without a flood of letters and “free gifts” from lenders. Nowadays the 18-34 age crowd is using mobile apps such as Klarna for their shopping needs both online and in stores.
You might be wondering why these apps appeal to this group in particular. United States millennials beat out United Kingdom millennials (74 percent to 58 percent) as customers willing to spend more than $50 in a store and/or online; Generation X in the U.S. came in close behind at 71 percent. And according to Klarna, 44 percent of its shoppers would have abandoned their purchases had there been no Pay Later options.
What does Klarna do that traditional layaway programs don’t?
Klarna gives shoppers three ways to pay off costs after a credit check is performed: pay in 30 days, pay in four installments, or slice it into longer time periods (usually for pricier items). Klarna clients get paid immediately, and the customer gets to “try it before you buy it.” The first payment is made to Klarna as soon as an item is purchased, and the rest are specified beforehand.
If Klarna sounds similar to Bill Me Later (now PayPal Credit), that’s because it is. However, PayPal Credit can also be used to “Send Money” to another user, with a 2.9 percent interest rate and $0.30 per dollar per transaction. Klarna’s international team also includes PayPal on its list, along with Apple, Facebook and Google.
But even without the loan feature, according to the official Klarna site, more than 130,000 merchants in 14 countries are using this Swedish company as their third-party purchasing option. IKEA, H&M and Adidas are a few well-known clients, and Shopify has it too.
While merchants get paid in full immediately when a buyer purchases a tangible item, Klarna’s Buyer Protection Policy covers them from damaged or defective goods, incorrectly shipped items, and/or items that never arrived. Ineligible purchases from Klarna include downloadable items (ex. Music or audio books) or personalized products.
The new layaway plan via smartphones
But why bother with mobile payment plans when store layaway plans are long gone? Even major retail stores such as Walmart stopped their layaway plans back in 2006.
One reason could be that electronic options have a bit more leverage than brick-and-mortar stores. Online apps could arguably reduce the kind of payment confusion that happens during a store closing. For example, when a Kmart store in Ohio shut down, customers who had layaway plans were told by store employees that their payback plans would be expedited.
While Sears (the parent company of Kmart) went back-and-forth with customers who worried that they would have to scramble to pay money back earlier than agreed upon, soon-to-be laid-off employees were just as confused about new store policies. This left customers in the middle wondering what to do next.
Although approximately 1,400 Kmart and Sears stores have closed in the past five years, Kmart still confirms a layaway plan on their site.
But today’s customers have more power to control what they buy and win in today’s mobile economy. The retail industry has clearly started moving into a cashless payment trend, whether it’s through cryptocurrency or mobile apps that charge once per month (ex. Argo Tea’s LoyalTea membership point program).
And unlike traditional layaway plans, customers do not have to wait until the final payoff to receive their items. They can walk out of the store (or order online) to use each item immediately. Layaway plans may save customers money from impulse buys later on down the line, leading to swift refund requests after the final layaway payoff. Klarna purchases mean the customer immediately walks out of the store with the item, possibly breaking it in and enjoying the item(s) sooner.
Because payments are made upfront to the merchant ahead of time, consumers are responsible for paying Klarna back, not the stores. This may give consumers a bit more relief about where they purchase from and help merchants know they’ll get their money on time.
Perks from a consumer’s perspective
College students (and younger people in general) who have not made any big-ticket purchases are left to build their credit. And because Klarna, one of Europe’s largest banks, also does a credit check, this could help boost their credit rate scores. So whether they’re buying furniture for their dorms or a few outfits for an on-campus party, they’re getting items they want without emptying their purses and wallets. And their credit scores improve. That is, assuming they actually pay on time.
Approximately 78 percent to 87 percent of Americans (baby boomers, Generation X and millennials) are impulse buyers.
This means that product placement in stores and suggested items online can be even more profitable if done correctly. Impulse buys from traditional layaway could lead to customers losing interest in their items months later once they’re paid off.
And with approximately 10 million Americans onboard for installment plan purchases, cash-only retailers and credit card-only retailers may need to start bending with the trends. Otherwise, they could be left behind for their competitors who already know the appeal.
By SHAMONTIEL VAUGHN | Contributing Writer