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All 21-year-old Taylor Emmi wanted was a cosmetic kit from makeup artist and social media star Jeffree Star after watching a video about the brand on YouTube in October 2019.
So she took the $144 leap, and nearly two years later, she’s shelled out thousands on a makeup brand she normally couldn’t afford thanks to a buy now pay later platform known as Afterpay.
“Obviously I really like the things and want to collect them, but I would have never been able to have half of it without Afterpay,” Emmi said.
Buy now pay later platforms that allow customers to purchase on installment plans are growing in the U.S., and younger Americans seeking new ways to purchase high ticket items like computers and designer clothing with lower wages are obsessed.
While the platforms have existed in the U.S. for years, demand and investor interest in the companies are starting to pick up. Just this week, digital payments company Square said it would purchase Afterpay in a $29 billion all-stock deal. As of June 30, Afterpay served more than 16 million customers and roughly 100,000 merchants.
Apple is also reportedly teaming up with Affirm Holdings Inc.‘s PayBright to launch an installment program for Apple devices bought in Canada, according to Bloomberg. And shares of Affirm, which went public in January, are up about 23% in the last three months as of Friday. Klarna is valued at almost $46 billion and raised $639 million in a funding round led by SoftBank.
And a lot of that interest is coming from the younger generations, millennials and Gen-Zs, who are turning to the various BNPL platforms instead of traditional credit cards with high interest rates.
CNBC interviewed seven Millennial and Gen-Z buy now pay later users for this story. The majority said they were drawn to the platforms for their convenience. At least six were influenced by peers or social media to start using the platforms and the majority started within the last year.
How buy now pay later works
Platforms like Afterpay allow users to make big box purchases like a new MacBook without having to shell out the entire cost upfront. They typically let users pay in four installments over a six-week period. Most also offer a companion app or web browser plug-in to equip payment with the merchant’s website.
User accounts are typically linked to a debit card or bank account, where payments are taken out automatically. They also offer automated reminders when an automatic payment is coming up. As a user makes more on-time purchases with the platform, their spending limit grows. For Emmi, that limit is $2,000 on Afterpay and $1,000 on Klarna.
Many platforms don’t charge interest to the customer, making money mostly off of retailer fees and some late fee charges. Affirm does charge interest. The platforms grew 215% year-over-year within the first two months of 2021, an Adobe analysis suggests. Studies have shown that when consumers pay in installments, they typically spend more.
‘It sounds cheaper’
Many younger consumers say they use buy now pay later because they want new clothing or electronics and don’t have the money, said Joseph Flowers, a full-time content creator. The 22-year-old regularly updates his wardrobe for his social media videos and uses Afterpay when a bill tops $300.
“This generation likes to buy a lot of things,” said Flowers, who started using Afterpay when he was approached for an advertising campaign. “I spend a lot of money, and it makes me feel better when I don’t have to pay it all at once.”
Breaking up costs because it “feels smaller” is not uncommon among younger generations, who struggle to think about or plan for the future, said Sarah Newcomb, a behavioral economist at financial services firm Morningstar. In the U.S., consumers focus on material goods rather than saving, a problem that social media is amplifying, she added.
Chiziterem Ogbonna admits there is a culture on TikTok and social media where people overspend and that is contributing to the growth of buy now pay later among her generation. Many platforms are utilizing TikTok for paid advertising campaigns with influencers, a platform some cash-strapped Millennials and Gen-Zs are also utilizing to crack jokes at the trend.
Eighteen-year-old Ogbonna typically uses Klarna for clothing company Shein purchases over $100 because four payments of $25 “sounds cheaper even though it’s not,” she said. At least four of those interviewed echoed that sentiment.
Some experts say in the wake of the financial crisis, younger generations are steering clear of traditional credit and debit. Emmi, the 21-year-old who works as a bartender and waitress, has two credit cards she rarely uses. She likes not worrying about overusing her credit limit with Klarna or Afterpay because “they don’t know that you owe anything.”
Many younger Americans say they use buy now pay later sparingly. Of those interviewed, at least four said a purchase needs to top $100. Emmi uses Afterpay or Klarma on any purchase she can but cautions overspending, a lesson she learned when she lost her job during Covid-19 and struggled to pay mounting installment bills.
“You want nice things and think ‘I’ll be able to pay for it over time,'” Emmi said. “But a lot of time you do have to scrape to [make a payment].”