Klarna
Processing a million transactions a day, Klarna is one of the leading forces in the buy now, pay later industry.
David Sykes, the head of Klarna for the United States, told TODAY that the company helps make shopping easier for people. While some components allow for budgeting and cash-flow management, many customers use the app without using the payment component.
Klarna gives shoppers three ways to pay. The first is like Sezzle, offering payments in four interest-free installments over a certain time period. The second is paying within 30 days with no interest or fees. Shoppers can also finance at their own pace over six to 36 months, which may bear interest. This means that customers may be subject to interest if they don't pay their balance by the due date each month. Klarna uses the annual percentage rate for standard purchases, which is 19.99%. Customers only face potential interest in the financing option.
Sykes says that credit cards are king in the United States, but credit card companies are largely based on the foundation that they benefit through interest when customers miss a payment.
"We win when our customers pay us back," Skyes said. "Credit card companies win when the customers don't."
According to Sykes, the average value of an order made through the Klarna app is $150. If any payments are missed, the user will be unable to make another purchase through Klarna unless that payment is made.
Afterpay
Like Sezzle and Klarna, Afterpay offers users a chance to purchase an item using interest-free payments every two weeks over six weeks. With 15,000 retailers in the United States and 50,000 globally, Afterpay is seeing that 90% of its audience is paying with a debit card, according to Melissa Davis, the company's chief revenue officer.
"We really focus on responsible spending and making sure that people are able to pay on time and with the funds they already have," Davis said. "Ninety-five percent of our audiences pays on time."
Consumers that use Afterpay are not subject to interest, consumer fees or credit checks. However, in its installment agreement, Afterpay outlines that for California users, the company could submit a credit report to a reporting agency if the borrower "fails to fulfill the terms of Borrower's credit obligations," which could negatively impact your score. Afterpay told TODAY they have not reported to any credit bureaus to date.
According to Davis, Afterpay is more of a budgeting tool so that purchases become less about being able to afford the item but budgeting it within a customer's everyday expenses.
Like Sezzle and Klarna, Afterpay does not let users keep using the service if they fail to make a payment, helping them avoid a "revolving line of debt."
Is it worth it?
Tiffany Aliche, founder of the Budgetnista, a financial education company, remembers going to stores with her mother when she was growing up and watching her mother buy items on layaway. This interest-free process of reserving an item and picking it up after paying for it in installments has transformed into the debit or credit processes seen online today.
The benefit of layaway at the time, Aliche told TODAY, was that you had physical money leaving your presence. When it comes to online shopping or even just swiping a credit card, it is much easier to overspend or max out, she said.
"I don't believe in having a couch bill, a lamp bill, a table set bill...those are things that you really ought to save for and purchase one time," Aliche said. If people spend more than they make, it starts to pile up, and at some point, the bills come due.
While a buy now, pay later program is easy to use, especially when there are no fees, Aliche wishes consumers would choose to save. She emphasized that these purchases add up to the rest of your financial life.
But Aliche doesn't recommend avoiding buy now, pay later programs at all cost. If you can pay it off in three months, it is OK in her book, however, anything above that gets into the danger zone.
"If something is $150 and you have $125, wait and save," she said.
If you are unable to wait for a purchase and feel like you need to have a certain item, Aliche suggests thinking of not being able to wait as a chip in a glass. Each time you don't wait, the glass gets another chip, and at some point, enough chips will break the glass.
While buy now, pay later programs are easy to use and seem to be at the consumer's convenience, Aliche and Cardone both say they benefit the retailer much more than the customer.
"If it's easy to do, it's probably not good for you," Cardone said.
