“Buy Now As low as $31.19/mo.”—a feature of most commerce websites that has always confused me. How does the price get so low? Should I do this to buy more stuff now? In particular, StockX’s implementation of Klarna initially and now PayPal “Pay in 4” stood out to me as a route I could use to buy $300 Tie-Dye Jordan 1s. I did not end up purchasing this pair via this method, but the bolded, new button struck a curiosity: what if I did just pay $31.19 a month? I could make a purchase that I could not afford at the time, and get the product I wanted.
Both PayPal and Klarna fall into a larger group of companies that provide a service called point of sale financing. These companies, including others such as Affirm, Afterpay, Sezzle, Quadpay, aim to provide “flexible, pay-over-time installment options” for customers, and “an increase in traffic, customer spending, and, of course, revenue” states point of sale financing provider United Consumer Financial Services. The benefits of this service for merchants are innumerable, which is reflected in the large increase of sites using this service. A figure from McKinsey Consumer Lending Pools states that the volume of point of sale balances “has taken 3 percentage points of growth from credit cards and traditional lending models.” Though 3 percent may seem small, this percentage equals about 10 billion in revenue, an incredible amount of growth highlighting the scale of the United States credit card and lending industry.
As you may have noticed, point of sale financing is a direct evolution of layaway, a service in which the customer pays a deposit to reserve an item or service for later purchase. Layaway was first introduced during the Great Depression in the 1930s and continued in use until the popularization of credit cards in the 1980s. Though largely phased out, layaway still stuck around until the early 2000s in which many of the companies that offered this method removed it entirely. Then, during the 2008 financial crisis, layaway made a return. Many large companies such as Walmart, and Sears began to offer layaway again. After this resurgence, a new form of layaway began to emerge: point of sale financing. In an article from 2019, Kathryn Roethel Rieck a writer for Bloomberg Second Measure states: “A new industry is aiming to take the pain out of paying for holiday gifts (and many other things).” Point of sale financing, though similar to credit cards, appeals to a general category of consumers: the financially cautious. In comparison to credit cards which allow the user to carry a balance, point of sale financing specifies the period in which the consumer must pay. Along with a time frame, these loans are usually interest free and without additional fees. This advantage is vastly appealing to the financially savvy consumer who carefully manages expenditures.
Another compelling aspect of point of sale financing is the ease with which such loads can be taken. In another figure by McKinsey Consumer Lending Pools, conversion rates of sites with point of sale financing increase with the amount of integration provided. With maximum integration, conversion rates increase by 3.2% compared to other states of integration. In my example of StockX’s case, the site offers something similar to the “throughout website” category of integration. I can attest to the draw of this option displayed on the site. It was a direct inspiration of my curiosity for this method purchase.
With more and more companies further integrating point of sale lending into their websites, only more consumers will be exposed to this improved and easy to access form of lending. In the near future “26% of the retailers plan to start accepting them (point of sale lending) in the next two years” writes skeps.com. Some examples of the draw for these retailers are the ability to “widen customer base”, “increase average order value”, “improve cash flow”, “make more sales”, and finally “save money and time” states United Consumer Financial Services. Each of these benefits can be attributed to the convenience, and simplicity that point of sale financing allows for the consumer. But what are the disadvantages? For companies, there is little to none. Increased purchasing capability for the consumer will generally result in better sales numbers for the company, hence why so many websites have begun to include this service. For the customer, the general concerns with credit and loans apply, such as overspending. Though in reality to the average, financially conscious customer point of sale financing is a benefit.
Sources:
https://www.skeps.com/blog/exploring-the-rise-of-pos-financing-part-2
https://www.ucfs.net/benefits-of-pos-financing-for-merchants/
https://www.forbes.com/advisor/personal-loans/point-of-sale-financing/
March 14th, 2023 at 9:33 am
Hi Anton!
Your blog caught my eye because I recently listened to an episode from my favorite podcast, NPR’s Planet Money (which I highly recommend you check out if you’re even tangentially interested in econ) about the pitfalls of buy-now, pay-later payment plans. To that end, I would argue that these plans are inherently dangerous because they take advantage of our cognitive biases as consumers.
As with any loan, these payment plans operate on the pleasure principle, preying on the human impulse to seek immediate gratification. Especially because so many of these plans offer virtually no interest rates and fees (actually, the cost of this model is levied on the business selling the goods, who have to pay more to sell through the buy-now, pay-later companies than they would through a traditional credit card company), they often feel too good to be true – the dangers of overspending are compounded by the absence of interest. A 500 dollar bag split into 10 payments of 50 dollars will feel more affordable, even if the raw price has not changed. The U.S. Consumer Financial Protection Bureau intends to regulate this industry, and with good reason. As one guest interviewed in the podcast I listened to put it, it seems like “free money”. Until it’s not.
March 14th, 2023 at 10:10 am
Anton, the title of this blog caught my eye and made me intrigued to read more. I have also noticed a rise in point of sale financing on numerous commerce websites that I have visited recently. It’s especially common in my experience on websites where you can buy jewelry like Pandora and Macy’s. As you mentioned in the sources that you cited, this method of payment is truly an ingenious marketing tactic, and it makes sense. Of course consumers would be more intrigued by the idea of paying only $59.70/mo. for 6 months rather than paying $340 up front, especially when the interest rate is minimal or even nonexistent in most cases. Like you said, point of sale financing definitely appeals to those who are financially conscious and astutely aware of the money they are spending. For people who like to budget, I think that it is a great option. However, I also think that point of sale financing can be a dangerous trap if you do no strongly consider what you are doing in making a purchase through this method. If you know what you are doing, then it is no problem at all, but if someone makes a purchase without a plan for how they will fund that purchase over the time interval, then it can become a slippery slope.
March 14th, 2023 at 9:46 pm
Hi, Anton. This is my first time commenting on your blog, and you have chosen an interesting topic. This process of financing a purchase is one companies use to prey on the poor.. The reason this financing model prreys upon these two groups is because those who are poorer may not be able to afford certain things at one time and have to make the consistent monthly (or yearly) payments in order to acquire what they are buying. This way, companies can scrape every extra cent out of their wallets. this is less of an issue with luxury items such as Jordan 1 Retros because the less wealthy people are not the target audience of these things any way, but for more necessary items, this Is much more of a problem. The interest stacks up the longer it takes to make the full payment. Anyone who has enough money and has thought their purchasing process through would never pay the extra $18.19 or $34.26. Ideally, everyone would pay everything outright. I enjoyed reading this and learned something, too. I think the most important sentence is that there are no disadvantages for companies when using this model of financing. Thank you for the entertaining and informative read.
March 15th, 2023 at 5:03 pm
Hi Anton! I’m actually using the paypal pay in 4 payment right now! I have quite a few transactions going but the pay in 4 is very convenient because it allows me to pay for a lot of things at once while waiting for my other paychecks to come in!
I also use Klarna and afterpay for my purchases, although I am not able to use affirm because my card is relatively new so I don’t think I have enough credit score on it to apply. I think you should use the paypal pay in 4 though, I do the one that’s not every month because then you end up paying more at the end which rubs me the wrong way. Pay in 4 does the same with no interest, although the time frame is shorter since it’s a payment once every 2 weeks. I think if you’re working a part time job, it’s fine because then your paycheck will have come in by then.
It’s very cool that you looked into the history of this! I did not know that the companies made THAT much off of the pay in 4. I wonder why they offer no interest ones then?
March 16th, 2023 at 1:48 pm
Anton,
Initially, it was your picture of the prices and the effect APR has on them that caught my eye. I must say that I am not particularly educated on the topic of shoes, but I can assume that this is similar to taking out loans on a house or cars, something that I learned about in consumer economics class last year. I must say that reading your blog was very refreshing in educating me on things that I am not acquainted with. I usually pick to read posts that will either humor me or are things that I have already heard of so I can comment on it with a share of similar or different opinions. But, I knew nothing about your topic going into this. To be honest, I originally thought it was going to be something about stocks. But, I do like the post about shoes. Your post was also eye-opening. I did not know that there was a interest rate applied to those who split up their payments. I also really appreciate the evidence you gave at the end. I have never before seen someone who has cited their blog post. It makes it seem almost like a Ney York Times article or something along those lines. After reading, I am now more aware of what could happen when I choose to make my payments separately and not jointly.
March 16th, 2023 at 5:25 pm
Anton,
I found your blog post incredibly interesting. I personally do not have extensive knowledge about the economy or the intricacies of sale financing, however, it was interesting to read your post and you opinions on the matter. I certainly believe that there are benefits to Layaway for customers. For instance, one can reserve an item they wish to buy, so that they do not have to worry about gaining access to the item later. This is incredibly useful for individuals who want to ensure that they are able to receive the items that they want. I find it interesting that companies removed Layaway and then brought it back. In my opinion, Layaway seems like an effective system that caters to the needs of a variety of customers. I also found it interesting how you discussed the accessibility of sale financing. Prior to reading your post, I believed that sale financing was a complicated process and that it was difficult to take large loans. However, I was surprised to learn that it is easy for individuals to take loans in order to participate in sale financing, and this system is accessible to a variety of individuals. In your future posts, it would be interesting to read more about sale financing and your personal experiences with it!