A loan by any other name…

In today’s edition of “things that don’t sit right with me” – online layaway. I’m being facetious, but the premise is quite similar!

Affirm and Afterpay both offer customers the opportunity to pay for their online purchases over time in more palatable installments versus a lump sum payment. Both set out to solve retailers’ issues of low conversion rates [Conversion is turning traffic into revenue aka sales]. The main difference is that with traditional layaway – you have to make the payments before you receive the merchandise. But with Affirm and Afterpay, you get your stuff and then deal with the bill. A breakdown of some key differences between these two business models…

  • Affirm
    • generally for stores w/ higher priced items – Wayfair (furniture), Priceline (hotels, plane tickets), Purple (mattresses), etc…
    • actually markets itself as a loan (i.e. – lists APRs and is transparent about pulling credit reports)

snapshot of Priceline checkout w/ Affirm

from Affirm’s home page. but the terms of service state that Affirm loans range from a fixed 10% up to 30%, so what’s the truth?

  • Afterpay
    • retailers at this point seem to be mostly clothing stores & other discretionary goods? (Forever 21, Madden, Ulta)
    • interest-free service where you only pay late fees if you miss payments

snapshot of Afterpay

I went through the terms of service for both of these companies just to see what the deal is. Because Affirm is a bit more forthcoming in their advertisement, I’ll switch gears and focus on Afterpay.

What gets me about Afterpay’s marketing is the insistence on “free and easy”. I completely understand that they make (probably a good portion of) their money from marketing. Let’s say Jane Doe is fresh out of college and has landed her first full-time office gig. Hoodies and Uggs may have worked in lecture, but aren’t becoming for the workplace. Now Jane needs office clothes ASAP but money is tight. Urban Outfitters offers Afterpay so she can pay off her clothes easily over time while GAP doesn’t – so she’s going to go with Urban Outfitters instead. I totally comprehend that business value.

I couldn’t figure out how the application decision worked given their lack of transparency around when they decide to pull a credit report. But there IS decisioning logic used on Afterpay’s side, because they frequently reference application approvals in their ToS (so logic would have it that there are denials as well).

And to their credit, why would any business give away thousands upon thousands of dollars only under the protection that I, as a consumer, pinky promise to pay it back? Not to mention, that without the added service of an installment loan, Afterpay would be nothing more than a carbon copy of Rakuten (formerly eBates). The following sentence comes verbatim from their Terms of Service:

You agree to provide any information or documentation reasonably requested by us to verify your identity in connection with your Afterpay Account, and you authorize us to make, directly or through third parties, any inquiries we consider necessary to verify your identity.

So at some point in the future (or perhaps never at all!), Afterpay may pull your credit report to determine that you are who you represent yourself to be. But it’s the uncertainty of pulling the credit report that is a bit troubling. If I’m making a $500 order, will you pull my credit? What if I successfully paid off my first $200 order w/ no issue, but then during my next $600 order – I slip up and am late with my third payment? Before I make my next $650 order, will you make a credit inquiry to see if I’m becoming insolvent or if that was just a fluke? Who knows, but if you agree to the ToS, Afterpay has that right and can invoke it at any point during your agreement.

We may, in our sole discretion, not provide the Installment Feature to you, or cancel an approved order before the goods or services are delivered or supplied for any reason including but not limited to your history of transactions with our service provider Afterpay or to prevent against fraud, legal, regulatory or nonpayment risk.

— From Afterpay’s Purchase Payment Agreement.

I don’t want this post to seem like an indictment of Affirm or Afterpay, or anyone who has used or plans to use these services. The holidays are pretty here, and using an installment loan can certainly help to make the financial hit of the season feel a little less harsh. I just to inform others to be weary of hopping onto the newest, hottest service without doing some due diligence. So… what will be the next innovation in the online shopping experience? Do you use these apps or any other similar services?

– J

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