Credit Card or DIP?
Credit card debt continues to rise, according to U.S. personal financial information company NerdWallet, but a recent newcomer is also beginning to make its mark with consumers. That newcomer is digital installment plans or DIP. CivicScience, a U.S. market research, and intelligence firm revealed that the popularity of interest-free digital payment programs jumped from 24% in the first quarter of 2019 to 30% by the third quarter of last year. The company said its popularity was largely among budget-conscious younger consumers like millennials and Gen Z.
What This Means for Retailers
Digital payment programs allow consumers to make purchases and then pay for them over a period of time while incurring no interest charges at all. While this may suggest more major purchases, Payfort, an Amazon company, Sezzle, and Afterpay are the three companies currently offering this in the U.S. One might assume that an interest-free program would reap more major purchases, but Paul Paradis, the co-founder of Sezzle, told e-Marketer that their average order is $80. He added that this may mean more consumers moving away from credit cards or not even having any.
Afterpay’s Ben Pressley agreed. He said the Federal Reserve recently disclosed that about 66% of millennials don’t even have credit cards. As if to echo Paradis, Pressley also added that Afterpay’s average purchase is $125. Data from CivicScience last October supported Paradis’ claims. It revealed that 31% of users ages 25 to 34 and 28% between 18 and 24 showed an interest in using the digital payment for lower-priced goods. CivicScience also predicted that those percentages would increase as more brands offered this option.
Sezzle presently works with more than 7,500 merchants. In serving them, Paradis said they’re already processing more than 15% of sales. He expects digital payment to not only be a viable option, but also a marketplace disruptor in the next two or three years.
Afterpay serves more than 90,000 U.S. merchants. More than 3 million American consumers use Afterpay and Pressley attributes it largely to millennials who grew up during the last recession and witnessed the financial challenges their parents experienced. “They like this idea of spending their own money when they want to spend it and having more control over the experience,” Pressley told eMarketplace.
While younger consumers may be leaning more towards interest-free DIPs, Pressley had several other interesting observations. He said they’ve observed that consumers who might normally purchase three or four items are now buying seven or eight because of DIP. He added that in Australia, where Afterpay got its start more than four years ago, repeat usage is also frequent.
The other thing Pressley said they’d observed was a change in some consumer behavior. He said that some customers who wanted to purchase a particular product were also searching for merchants who accepted Afterpay.
Pressley cited the success story of an online shoe manufacturer they worked with, who experienced a better than 100% increase in sales and more than 80% in gross margins after utilizing Afterpay. However, he added that most of the retailers they worked with see a 15% increase.