Are Millennials Really Over Revolving Credit?

Consumers and their credit providers aren’t always aligned when it comes to best outcomes. For a customer using a revolving credit tool, such as a credit card, the best outcome is to pay their balance in full each month, which has the benefit of buying now and paying later, with none of the attendant harms like paying an interest fee.

However, that usually isn’t the best outcome for the card issuer.

From the issuer’s point of view, the best outcome is for the consumer to use the credit product and repay some of what they borrowed at the end of the month, but not all of it, so they can start making interest payments on the remaining balance. If they happen to forget their bill for a day or two, and end up paying a late fee, all the better.

That fundamental difference in what counts as a best-case scenario has caused millennials to turn away from revolving credit products, Afterpay Co-founder and CEO Anthony Eisen told PYMNTS in a recent conversation. They’re not transparent, they often have hidden costs and they come with a “long and glorious tradition of making it easy for consumers to get bogged down in a debt trap” — and making it hard for them to get out again.

Eisen noted that Afterpay was founded upon a rather novel idea: Offering “buy now, pay later” as a financing product to be monetized actually provides no benefit to retailers, and works to alienate consumers. On the other hand, creating a financing option for merchants to offer as a customer acquisition and retention tool could have a future.

“So, we built our product with budgeting as our model instead of a revolving credit mindset, because we believe, if we could do it effectively, it would work for our retail partners as something that could generate repeat business from good customers who transact often and budget efficiently,” Eisen said.

When Afterpay launched in 2014, it “broke every rule of conventional wisdom,” he explained, and was widely described as something that could never work. Yet, the firm recently announced a global active customer base of 61 million, annual sales in excess of $8.5 billion and a merchant base that has nearly doubled over the last year to 40,000.

With a $200 million investment and a strategic partnership with Coatue Management, Eisen noted, the plan for next few years is to bring the Afterpay product to even more global markets.

Budget Management For Customers

According to Eisen, Afterpay was, in some ways, designed to be the opposite of a traditional financial product — it is more of a budgeting tool than a way to defer debt. A customer makes their first payment at the time of purchase, then pays off the rest in three equal installments every two weeks — no exceptions, no late payments. If a customer doesn’t pay on time, their service is suspended, and they can’t use the platform to buy anything else.

“This is directed toward responsible spending,” explained Eisen. “We have strict limits, and you make a payment every two weeks. This isn’t a system where, a month later, you see how much you’ve spent, and can pay a fee like an interest payment to keep kicking the can down the road.”

It’s a method to which its customers have responded strongly, he said. On average, customers start making a few purchases using Afterpay — maybe four or five in a year. As they spend more time on the platform, that number generally increases to 11 or 12 in a year. Australian customers who have now been on the platform for a few years make around 22 annual purchases with Afterpay. The usage numbers in the U.S. and U.K., where the service more recently launched, are following a similar pattern.

These aren’t just a few large, one-off purchases customers are making, Eisen noted. The average purchase amount on Afterpay is around $150, and that hasn’t changed much since its launch. Customers don’t change what they buy so much as how they pay — and how they use the financing product as a budgeting tool.

A Better Connection Point

Instead of making money on consumer fees, Afterpay charges the merchants for a cut of the transactions made via the platform. As Eisen explained, retailers pay that fee because Afterpay brings a lot of business to the site — both in the form of previously loyal customers, who can now purchase more often because of Afterpay, and customers on the Afterpay platform seeking merchants that offer the service.

Afterpay had hopes to build a popular service, but ended up building a service rather beloved by its most frequent users, said Eisen. That means the platform refers a substantial amount of business to the retailers with which it works. Other than perhaps Google, he noted, it is the single-largest provider of leads to Australian retailers.

“In October alone, we were worth 10 million leads from our app and our website to core retail partners,” he said, which is a big inducement for brands to sign on. In 2019, some rather large brands joined the Afterpay family, including eBay, Ulta, Finish Line and Marks & Spencer, among others.

Retailers weren’t the only high-profile players joining Afterpay. The company recently announced that Facebook’s former Chief Marketing Officer Gary S. Briggs will join its board of directors, effective Jan. 1, 2020. Eisen noted that Briggs was a natural fit for Afterpay because he understands its consumer-first ethos, and the commitment to build a product that “presents a win-win for all involved in it.”

Win-wins are often spoken of in payments and commerce, but firms that truly deliver on that promise are few and far between. However, Afterpay can point to a platform that is doubling in terms of customer numbers and retail participants year on year, which seems to show it is on to something when it comes to how consumers are (and are not) comfortably using financing tools to enable retail purchases.

Pleased with what the platform has done so far, and now enriched by both Coatue’s analytics expertise and a $200 million investment, Eisen noted that there is only one thing on the agenda for 2020, though it is a big thing: growing up, growing out and getting to a truly global scale.

“We won’t be just looking at a map and picking hot retail targets,” he said. “Our goal is to have the opportunity to really follow our retail partners into more markets, and make our brand opportunity fully available on the global stage.”