Buying a new purse? This startup wants to help you pay for it — but could also get you into debt.

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In an Urban Outfitters ad, a young woman turns on a neon sign on a bedside table that becomes increasingly cluttered with neutral-toned home decor. In another, against a backdrop of millennial pink and macrame, the woman gazes at her phone and grins.

These ads are ostensibly for the youth-oriented retailer and its woven wall hangings, crystals, ceramics, and other mid-priced kitsch — but they are primarily for Afterpay, a point-of-sale installment payment service that allows a customer to split purchases as low as $35 and as high as $1,000 into four separate charges.

Afterpay insists it is not a finance company and that its service is not offering loans to consumers. It is “a retail tool, not a finance product,” according to founder Nick Molnar. Critics say this is just semantics and that the company is avoiding fair financial regulation.

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While young shoppers are earning less and may be wary of adding to their already steep debt loads with lines of consumer credit, they’re more likely to take out personal loans. Point-of-sale installment payment services aimed at young consumers and their particular tastes are proliferating; other competitors including Affirm, Quadpay, and Sezzle are proving popular among this cohort. Their breakout success seems to be influencing the traditional competition, as credit card companies scramble to recapture the coveted demographic with their own attempts at installment payments: In late 2017, American Express launched Pay It Plan It, which allows cardholders to pay a flat monthly fee for the ability to divide large purchases into a set number of interest-free payments.

Afterpay might be best compared to layaway, a service that all but disappeared with the advent of credit cards but has made a recent comeback, allowing shoppers to pay for big purchases in installments over time before actually taking possession of an item. Except with installment payment startups, you get your item now and pay later. And we already have a word for that: debt.

First established in Australia in 2014, Afterpay now has a market cap of over $3 billion Australian, or $2.2 billion US, and is traded on the Australian Stock Exchange — though it still isn’t profitable. Founder and serial entrepreneur Nick Molnar tops the Australian Financial Review’s 2018 Young Rich List of “Shadow Bankers,” with a fortune of $341 million Australian, or $250 million US.

The majority of Afterpay’s revenue comes from retailers, not shoppers. Stores pay a small percentage of each transaction that uses Afterpay to the startup, not unlike how they would to a credit card company. Since Afterpay debuted stateside at Urban Outfitters in May 2018, a growing number of US retailers have partnered with the service, which specializes in smaller “discretionary purchases” like clothing, jewelry, and homewares. Worldwide, the service is available at more than 17,000 retailers.

As of the end of 2018, the most popular stores for Afterpay payments according to the company are low- to moderately priced fashion and cosmetics brands: Urban Outfitters and its sister brands Anthropologie and Free People, along with Nasty Gal, Dolls Kill, ThirdLove, Kim Kardashian’s KKW Beauty, and the already outright cheap Forever 21 and Boohoo.

“More ways to go into debt are probably not what we need most right now”

Afterpay’s main US competitor Affirm offers no-fee installment loans with interest, but debuted a new no-interest three-month installment payment product shortly before Afterpay launched in the US. Afterpay does not charge interest, and it only offers one payment plan: Purchases are split over four equal biweekly payments, with the first paid up front. “Afterpay benefits when consumers pay off their orders in full and on time,” Molnar wrote in an email — but those who don’t are hit with late fees: $8 for each payment made one day late, and an additional $8 for every week payment is further delayed, up to 25 percent of the total purchase price.

According to ValuePenguin, 7 percent of Afterpay purchases are subject to at least one $8 late fee. But according to its latest annual report, released in August, nearly 25 percent of Afterpay’s revenue between June 2017 and June 2018 was derived from those consumer fees. In Australia, where Afterpay has been available for years, consumers are increasingly running into trouble with their buy-now-pay-later purchases. An Australian Securities and Investments Commission report found that one in six Afterpay customers had overdrawn their account or borrowed more money to make their payments. The National Debt Helpline is reportedly receiving a growing number of calls from Afterpay customers struggling to balance their mounting shopping debts.

“More ways to go into debt are probably not what we need most right now,” says Lauren Leimbach, executive director of the nonprofit Community Financial Resources and a former vice president at Providian Financial. “The way they’re marketing it, it’s all about purchases that help people feel good about themselves — that’s the subtext. It’s definitely a symptom of our society where people are using retail therapy. That’s not Afterpay’s fault, but it does get certain people into big trouble.”

Australian critics contend that the company was built within a legal loophole: Without set fees or interest, Afterpay and similar services fall outside the legal definition of a loan product. Australian regulators have recommended reforms to better regulate buy-now-pay-later services, including Afterpay, along with other consumer financial products.

“We are not offering consumers a loan, but rather a budgeting tool,” says Molnar. “We are advocates of responsible spending.” But Afterpay is pitched to retailers as a means to larger order values and more frequent shopping. The fact that more people are spending more money — money they may not have — is the reason the business exists.

Sienna Easterwood had been eyeing Afterpay for some time, but didn’t try the service until Cyber Monday. “I went directly to the Afterpay website to see if any brands I like use Afterpay as an option,” says Easterwood. “Steve Madden is a brand I love, but I’ve only had a few pieces from there over the years because I don’t like spending that much money at once.”

The deep holiday discount coupled with the short-term borrowing option convinced Easterwood to buy two handbags that she otherwise would’ve gone without, for a total price of $112. “Even with the 40 percent off I wouldn’t have bought anything, but it showed that my installments would be $28 so I felt better about it,” she says. Easterwood completed her payments without incident in early 2019.

Installment shopping plans may appear to be a service for customers, but they’re even more a service for retailers. Lenders that don’t charge interest make most of their money from retailers that are essentially paying to use the service in order to reach new customers and goose existing ones, and seemingly more than make up the difference in overall boosted sales. Merchants in turn promote the lender to customers, with the knowledge that they’re likely to buy more when they don’t immediately feel the price.

For some borrowers, Afterpay allows them to buy from brands with ethical supply chains and fair labor practices, and accompanying higher price points — brands that may have more trouble capturing dollars that tend to flow toward larger companies.

“Giving customers the agency to make a choice is more important than imposing restrictions on them based on my own feelings about credit cards or late fees”

Direct-to-consumer startup Everlane, which prides itself on its transparent business practices, recently added an Afterpay option to its site. Alongside Urban Outfitters and Steve Madden, much smaller clothing and beauty retailers including Jamie and the Jones, Vetta, and Moorea Seal also accept Afterpay.

Moorea Seal promoted its Black Friday sale along with a pitch for installment payments. “We want to give you access to great quality gifts for you and your loved ones at prices that are actually attainable for all. And Afterpay helps to make that happen. We love you!”

Tuesday Bassen designs and sells fashion and accessories primarily aimed at millennial and Gen Z customers. With just five workers producing all the brand’s products in California, Bassen says her prices can edge above those at other, larger retailers.

“We’re always searching for ways to make our clothes more accessible to everyone. We chose Afterpay as an option to help accommodate our customers that needed gradual payments,” she says. “I, of course, have concerns about any credit card or layaway program, but ultimately feel that giving customers the agency to make a choice is more important than imposing restrictions on them based on my own feelings about credit cards or late fees.”

She hopes that by boosting sales in the short term, she might be able to ultimately draw down prices overall in the longer term by scaling up the business. “My thought was that Afterpay would help us be able to produce in higher numbers, therefore bringing cost down to us and ultimately to customers as well.”

Following the launch of Afterpay across its brands, Urban Outfitters’ parent company reported record second-quarter sales, with some analysts crediting the installment payment option as a contributor. Third-quarter sales, reported in November, were up 9 percent over 2017. But if the brand’s superactive social media accounts are any indication, Urban customers aren’t naive about the downsides of shopping debt. As one commenter wrote on an Instagram post promoting Afterpay: “I’d only finance a house.”

While many young consumers are turning away from traditional credit cards, one survey found that there are actually more older millennials with outstanding credit card debt than student loan debt.

“There’s always been mortgage debt,” says Leimbach, “but the big growth is in unsecured debt and auto loans. So many people don’t have a living wage, and so they’re using credit just to meet their current needs.”

Urban Outfitters only ran one Afterpay campaign in 2018, featuring a black female model. This may be a marketing coincidence, but perhaps not: Black people are subject to more predatory lending practices and products — and overall pay higher interest and fees — than their white counterparts, regardless of their financial standing. Urban Outfitters did not respond to requests for comment about its relationship with Afterpay or the ad campaign.

“So many people don’t have a living wage, and so they’re using credit just to meet their current needs”

Like most new app-based lenders, Afterpay uses proprietary technology to determine a customer’s credit worthiness, as opposed to traditional scores. For young people with bad or no credit history, these loans can prove less onerous to obtain than the lines of plastic credit their parents popularized.

“The success of Afterpay is due in large part to our sophisticated, algorithm-based technology that applies fraud and repayment capability checks in real time prior to each order,” says Molnar. “Strict order and account limits are applied to users and only increase over time with positive user performance.”

Despite his insistence that it is not a lender, Molnar says, “Afterpay is fully committed to complying with applicable fair lending laws and treating all customers fairly.”

The timing of Afterpay’s US debut is serendipitous: Given regulatory rollback and the defanging of the Consumer Financial Protection Bureau under President Trump, the federal government seems less likely to pursue the regulation of existing financial products, let alone new ones, than it has in years.

“Under a different administration, this product would be looked at by the CFPB and the CFPB would make the determination if this exposes consumers to unnecessary risk,” says Leimbach. “It’s a ‘buyer beware’ world. Afterpay, Affirm, even credit cards are all part of the issue. And then you have a product like [Afterpay] come along that tips it a little further.”

Young people may make less money than ever and face blame for the deaths of various consumer markets, but they still want to buy things — and that means finding new ways to afford it. Urban Outfitters shoppers know that Afterpay sounds like trouble, but they also sound like they’ll try it. “This will be the death of me omg,” reads an Instagram comment. “Adds [Urban Outfitters] to my never-ending debt without question” reads another.

On an individual scale, interest-free installment payments can provide cheaper loans to young consumers wary of taking on more than they can pay at a given time — or they can mean a piecemeal shopping debt trap, built and deployed to benefit companies first.

So long as buy-now-pay-later startups are marketed and regulated as budgeting tools instead of loans, Afterpay and similar companies stand to convince more young customers who would otherwise shy away from credit that what they’re doing isn’t really borrowing, that just because they don’t have the money today doesn’t mean they don’t really have the money. And just as Australian regulators and consumer advocates are coming to terms with Afterpay’s influence in that retail market, the American market — less than a year into its own Afterpay experiment — may soon face similar struggles.

According to Afterpay, its non-loans are driving more frequent shopping and bigger purchases from customers who very possibly can’t afford them. If installment payments are a boon to some shoppers, they’re truly a blessing to a crowded retail sector fighting over fewer millennial and Gen Z dollars. But increased debt is not increased affordability. This is not feeding an appetite; this is proactive, not reactive service. And it’s only just beginning.

This story was produced with support from the Economic Hardship Reporting Project.