A modern form of layaway has come to a store near you and not just in the kitchen appliances department.
The “layaway” concept — when stores let shoppers pay in installments — has come to clothing retailers including Urban Outfitters, Free People and Anthropologie. Afterpay APT, +0.44% which first gained popularity in Australia after its debut in 2015, announced in late May that it now works with fashion brands Urban Outfitters URBN, -0.33% Anthropologie and Free People.
Urban Outfitters, which owns all three brands, did not immediately reply to MarketWatch’s request for comment.
Customers can pay for their purchases in four installments, which don’t carry interest. If they’re late on a payment, they’re not allowed to make another purchase on Afterpay until they complete their previous one. When they pay their bill late, customers must pay a late fee, which can be up to 25% of the total order value.
Afterpay’s expansion is just the latest evidence that consumers, especially young people, want to make purchases before they have the money to do so, said Nicole Leinbach Reyhle, founder of the retail business publication Retail Minded.
New York-based QuadPay and Menlo Park, Calif.-based UpLift also offer installment payment plans. Fashion-conscious customers are a natural fit for an installment plan, she said. “Those consumers are driven by brand status,” she said.
Young Americans gravitate towards layaway
Younger consumers are also less likely than their parents to have credit cards.
Millennials each have 2.5 credit cards on average, compared to 3.5 cards for baby boomers and 3.2 for members of Generation X, according to the credit company Experian.
The average order on Afterpay is for $130. About 85% of Afterpay’s customers put their purchases on debit cards, said Nick Molnar, the company’s CEO. The average age of an Afterpay customer is 33, and most are 18- to 40-year old women. In Australia, Afterpay purchases make up about 25% of total transactions for the retailers it works with, Molnar added. Although Afterpay has only been active in the U.S. for about a month, U.S. retailers are already seeing similar results, he said.
Retailers including linen-maker Brooklinen and appliance company Vitamix already caught onto the trend of new ways of lending to millennials: They have offered payment plans through partnerships with the lending company Affirm and payments company PayPal PYPL, -0.21% .
Klarna also offers a similar payment program, said Brendan Miller, a principal analyst at the research firm Forrester. And American Express AXP, -1.86% in September announced a program called “Pay It, Plan It” that allows consumers to split up their credit card bills into installments. But they require customers to pay interest.
The dangers of paying for goods in installments
Even though customers buying items through Afterpay don’t pay interest, it doesn’t necessarily mean they’re making smart purchases.
Customers have to go through an approval process. Afterpay does not pull their credit reports, but uses a proprietary system, Molnar said. The data the company analyzes is anonymized, but includes information such as the types of products certain demographics buy and their history on the Afterpay platform.
Afterpay rejects about 20% of its orders, Molnar said. Once customers are approved, they typically do pay: Afterpay loses less than 1% of its transactions, he added.
In some ways, Afterpay is no different from the other companies who have tried to lend to millennial consumers, Miller of Forrester said. “I think it’s just essentially repackaging the old store credit card we used to get at Macy’s M, +1.01% or JCPenney JCP, -0.19% or Sears SHLD, +2.72% ,” he said. “These installment loans are offered in the checkout process, versus standing in the store.”
But that “repackaging” does seem to be working, he said.
“I think you’ll see more issuers jumping into this,” he said.