Urban Outfitters buys into installment payment plan

Discussion
Photo: Urban Outfitters
Jul 06, 2018

Urban Outfitters Inc. has become the first U.S. retailer to use Afterpay, an Australia-based digital platform that offers interest-free installment plans to support online fashion purchases.

Through Afterpay, shoppers pay for products they buy online in four installments, with no upfront fees or interest.

“Afterpay helps shoppers get over that initial price hurdle by offering a platform to help budget for things that they want without needing to take out a loan or open a credit card,” said Nick Molnar, founder and CEO, in a statement. “This is particularly relevant for millennials who are reluctant to use credit cards and other forms of traditional finance.”

A 2016 survey from Splitit, another provider of installment plans, revealed that more than half of consumers polled (54 percent) preferred installment payments over free shipping. Nearly as many (53 percent) chose installments over a 10 percent discount offer.

Afterpay assumes all non-payment risk on behalf of retailers. The service is only available online.

Afterpay earns money from fees and commissions charged to retailers as well as late fees from shoppers. In Australia, retailers are reportedly charged 30 cents Australian (U.S. 22 cents) plus commission ranging from four to six percent for every transaction. Merchants receive payment within 48 hours, minus the commission and fee.

Urban Outfitter customers will be charged an $8 late fee for a missed payment and an additional $8 fee if the payment is not made within seven days. Late fees will not exceed 25 percent of the total order.

Mr. Molnar said AfterPay has proven to help retailers increase conversion rates and incremental sales by 20 to 30 percent.

Founded in Australia in 2015, AfterPay said it now processes more than 25 percent of all online fashion/beauty transactions. The platform has worked with more than 14,000 Australian retailers and brands, including Sephora, Estee Lauder, Lululemon and Myer.

Said Dave Hayne, chief digital officer at Urban Outfitters, “Preliminary tests in the US have shown promise, and based on the success Afterpay has seen in Australia, we have reason to believe our US customers will embrace this innovative new payment solution.”

DISCUSSION QUESTIONS: Would an interest-free installment loan platform offer much appeal to U.S. consumers and fashion e-tailers? Could interest-free installment plans become a bigger incentive for online purchases than free shipping?

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Braintrust
"An interest-free installment plan has strong possibilities for being a successful program."
"Debt, is debt is debt — add this new “loan” on top of those student loans and let’s see who can qualify for a mortgage later on."
"As an Australian myself, I know that Afterpay has become wildly successful in Australia, especially among Millennials..."

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19 Comments on "Urban Outfitters buys into installment payment plan"


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Lyle Bunn (Ph.D. Hon)
Guest

Let’s call this by what it is — consumer credit. And consumers love credit with the U.S. population typically spending to extent of their credit-worthiness. The Sears credit card program was one of its most profitable business units while also anchoring the loyalty of many customers. The range of store credit cards are a clear indicator that installment plans can be effective for fashion and online. But here is the caution: the communication with customers to minimize late fees is essential to the retail brand. It would be a shame were it to be eroded based on poor execution of the repayment plan.

Max Goldberg
Guest

Layaway plans are back, so why not interest-free loans to buy clothing? Americans love credit and interest-free has a great, consumer-friendly ring to it. I doubt this will lure a lot of business from Amazon. And should it catch on, look for Amazon to launch their own program.

Art Suriano
Guest

An interest-free installment plan has tremendous potential provided the company does an excellent job in granting the program to creditworthy customers. It is too easy not to make payments and most items, especially in apparel, have no value once they have been used or worn. So my only concern is those who renege on the deal.

That said, there are great opportunities for customers to buy more at one time because they’ll be able to budget four payments. Layaway was once a vast selling benefit and was quite popular before customers had credit cards. An interest-free installment plan offers the best of layaway because there is no interest with the same benefit of the credit card because you get the purchase before paying for the item in full. An interest-free installment plan has strong possibilities for being a successful program.

Kiri Masters
Guest

I believe that Afterpay does run the applicant through an approval process online before allowing them to sign up.

Art Suriano
Guest

Kiri,

You’re right. I’m sure Afterpay does but unfortunately, there is still that percentage of customers today who have figured out all the scams and that’s a shame because it ruins things for the rest of us. Hopefully that won’t happen with this program because it has many advantages.

Neil Saunders
BrainTrust

Is this such a new idea? It sounds very much like a digital version of the old catalog installment plans. It’s sensible though as it gives consumers another option of financing small purchases, especially useful for those who are unable or are unwilling to fund the purchase up front.

Kiri Masters
Guest

Not new, just new to Millennials!

Cate Trotter
Guest

Interesting idea — it’s a bit like re-imagining the store card for e-commerce. I don’t think it’s anything we’ve not seen before, it’s just being implemented in a different way. It seems like it would be attractive for more expensive purchases, but based on the figures cited above it seems customers in Australia use it quite frequently so perhaps it will be a default payment method. Obviously the downside of this is making sure that customers can afford to make the payments and that the brand relationship doesn’t go sour. I certainly can see the attraction on both sides of the U.S. market, so I will be intrigued to see what happens!

Kiri Masters
Guest

As an Australian myself, I know that Afterpay has become wildly successful in Australia, especially among Millennials, and I’m sure it will gain traction in the U.S. as well.

I’m not so bullish on the idea that consumers will prefer Afterpay over free shipping, though. Today, free shipping is almost a pre-requisite for online retailers. E-commerce adoption down under still lags the U.S. quite significantly, and I’m not sure we’ll see that U.S. consumers will be willing to give up their “right” to free shipping — even in exchange for flexible financing.

Rich Kizer
BrainTrust

You’re right Lyle. This is consumer credit. So lets see; if I miss a payment: $8 penalty. Then if the payment is not made then within seven days, another $8. And then, total late fees will not exceed 25 percent of the total order.

People will go for this potential interest-free loan, and I imagine many will join up with Afterpay. I am a little confused on late fees not to exceed 25 percent of the total order. Bad credit risks could take advantage of this! “The platform has worked with more than 14,000 Australian retailers and brands, including Sephora, Estee Lauder, Lululemon and Myer”? Sounds like something to be very aware of, retailers. And Max is right: keep your eyes open on Amazon’s reaction to a tool like this.

Evan Snively
BrainTrust
Evan Snively
Loyalty Strategist, Chapman & Co. Leadership Institute
3 years 2 months ago

It seems like Afterpay is having success, but it definitely surprises me.
The founder’s quote raises my eyebrows:

“Afterpay helps shoppers get over that initial price hurdle by offering a platform to help budget for things that they want…This is particularly relevant for millennials who are reluctant to use credit cards.”

My concerns are:

  1. I have not really seen a trend where Millennials do not want to use credit cards (quite the opposite);
  2. They seem to be targeting the fashion/beauty market which I wouldn’t think is the place people would need to “get over a price hurdle” (at least in healthy spending practices);

If this were to become more common place, I have concerns about users being able to keep track of their outstanding payments and knowing what the actual balance of their debt/savings ratio is. Hopefully it would not be abused to this point, but I suppose we already have the same issue with credit cards in this country!

David Naumann
BrainTrust
David Naumann
Marketing Strategy Lead - Retail, Travel & Distribution, Verizon
3 years 2 months ago

Younger generations are not fond of credit cards or carrying a balance on their credit cards. About a third of Millennials carry plastic, according to a Bankrate.com survey, compared to the majority of older Americans. In addition, a Fed survey reported that the 18-to-24-year-old demographic prefers to pay with cash more than other demographics. If they do pay with a card, it tends to be of the prepaid or debit variety, TD Bank found.

While approximately 75 percent of Millennials are in debt (student loans, mortgages and credit cards), they are becoming more credit adverse — especially for those types of credit that incur hefty interest rates (credit cards).

Interest-free installment plans might be welcomed by consumers as they may not consider it in the same category as other interest-bearing debt. I doubt that free shipping will be a factor in these purchase decisions, as most purchases with higher values usually come with free shipping.

Camille P. Schuster, PhD.
BrainTrust

As consumers enter the period of purchasing clothes for school and the Christmas season, an interest-free installment plan could have great appeal for consumers. Not all consumers will use an interest-free program but shipping fees are an issue for all online shoppers so I say shipping fees will continue to be more important.

Peter Charness
BrainTrust

Debt, is debt is debt — add this new “loan” on top of those student loans and let’s see who can qualify for a mortgage later on. There are plenty of examples around the world where spreading cheap credit fueled retail sales — until the music stopped, and the write-offs started. Would you really advise your children to take out a loan to buy fashion? Maybe that’s why they are still living at home. That said, from the standpoint of the retailers — customer convenience and a great service to offer.

Ryan Mathews
BrainTrust

I think it would, if the plan — as AfterPay does — assumes the liability for non-payment. As to the second question, I think that depends very much on who the target consumer audience is. Affluent shoppers value convenience. Less affluent consumers will respond to the appeal of, “buy now, pay later.”

Shelley E. Kohan
BrainTrust

Note: I work with Afterpay.

A win-win for customers, retailers and brands: Retailers such as Urban Outfitters, Sephora, MAC and others have shown a growing interest in adopting payment platforms that allow shoppers to buy now and pay later. Afterpay shifts the financial economics in favor of the customer, taking the burden and risk off of the retailer’s shoulders. The partnership helps retailers achieve their goals of driving sales, increasing conversion and creating a more engaged shopper base. Customers love the product with an 85 percent repeat rate, and 8x visit frequency rate per year. About 64 percent of Americans aged 16 to 36 do not own a credit card (according to a bankrate.com survey) so this may be a good option. Free shipping is the minimum expectation, pay over time is an added convenience which promotes greater spending.

Bill Hanifin
BrainTrust

Any advantage for a retailer to break through the noise of a highly competitive market and gain an advantage is worth a try. I’m a little disappointed that a trend could develop where consumers are encouraged to finance lower ticket items (clothes) that most financial advisors would recommend are purchased through cash saved and on hand.

From a customer experience point-of-view, the long-term impact on the etailers using the system will be formed by the level of delinquency that develops and the feedback in social channels about late fees and collection processes.

Craig Sundstrom
Guest

Installment buying and trade wars: welcome to 1930 everyone! Ultimately this is a consumer financing issue, and it’s probably not surprising to see it migrate online. What IS surprising, or really “alarming” is a better word, is who the vendor is: people who need to fiancé buying clothes … Am I the only one who sees this as an ominous sign?

Ricardo Belmar
BrainTrust
Ricardo Belmar
Retail Transformation Thought Leader, Advisor, & Strategist
3 years 2 months ago

Payment technology continues to be a source of innovation in retail. As shoppers’ needs diversify, it makes sense to diversify the methods of payments to facilitate a sale. Let’s face it — this is just another form of consumer credit. Clearly, it’s seen much success in Australia and I see no reason to expect anything different in the US. As others have noted, if this does become more commonplace, expect to see a variation of it from Amazon soon.

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Braintrust
"An interest-free installment plan has strong possibilities for being a successful program."
"Debt, is debt is debt — add this new “loan” on top of those student loans and let’s see who can qualify for a mortgage later on."
"As an Australian myself, I know that Afterpay has become wildly successful in Australia, especially among Millennials..."

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