Third & GroveThird & Grove
Apr 3, 2018 - Justin Emond

Don’t Miss 2018’s Biggest Digital Commerce Payment Trend

Retailers who adopt the newest online payment method will be rewarded with major sales growth.

It isn’t Square, Venmo, contactless payments, or a new, unproven service from some three-month-old startup in Silicon Valley.

It’s layaway—yup, layaway—and it could have deep returns for your business.

Seriously, pay attention to the modern version of layaway

Layaway isn’t a new concept, and there are plenty of players in the space, including  Futurepay, Bread, and Affirm. Each of these services provides a crisp, easy-to-integrate solution for merchants,  but there is one major problem with all of them: They aren’t great for consumers.

These digital layaway services are no different than a loan. When you use them to make a purchase, you get a hit on your credit report, and it’s the same as taking out a credit card with a really high interest rate. All these services also share a fatal flaw that makes them an untenable solution for those interested in consumers under the age of 35.

But a new(ish) company is changing all that.

The modern take on digital layaway is led by a service called AfterPay, and to a lesser extent Zip (formerly zip pay), their main competitor. AfterPay doesn’t function as a loan, charges users no interest, and does not hit a consumer’s credit report. The total cost of a good is simply divided over multiple payments.

AfterPay launched in Australia in 2016 and arrived in the US earlier this year in May 2018.

Just how disruptive is AfterPay?

The numbers are outrageous:

  1. AfterPay processes more than 10 percent of all ''physical online retail'' in Australia and more than 10 percent of the Australian population has used the service.

  2. In less than four years, the company had a valuation of more than a billion dollars

  3. The company’s stock price doubled this year

  4. This momentum is carrying over to the US market: The company’s sales in the US have grown much faster than after their Australian launch.

The Afterpay ecosystem is large, with nearly 15,000 retailers and two million customers. Here are just some of the retailers they partner with:

  • Urban Outfitters

  • Anthropologie

  • Lorna Jane

  • Free People

  • Hello Molly


So how does AfterPay make money? It’s a remarkably simple business model: The payment company pays the merchant the full price of a good immediately, and takes on the risk of chargebacks; the merchant pays a fee based on the price of the item, and the payment platform collects payments over time from the purchaser.

AfterPay is fundamentally different because it understands that the under-35 consumer is of a very different generation.

The reason behind the success of companies like AfterPay is simple: Platforms like Instagram drive consumption through social pressure and envy, credit card use is in a worldwide decline (read more on that below), consumers in the developing world live on digital cash stored on their mobile phones, and large numbers of rich consumers are more comfortable with cash than credit.

For merchants, is alternative credit worth the four to six percent  service fees?

We think the answer is a resounding yes. The two magic sources for growth for any retailer are happy customers and increased conversion.

AfterPay is a double threat:

  1. A staggering 86 percent of customers use the service at least a second time

  2. Merchants are seeing conversion rate and sales increases between 20 and 30 percent

These numbers don’t just move the needle, they break the freaking meter.

The rise of layaway aligns with the rise of cash and the decline of credit

Digital payments are growing at an astonishing rate. Nearly 750 billion digital payment transactions are expected by 2020. But this growth isn’t helping credit cards.

In the developing world, no one is using credit cards—they don’t need them.

Digital payment usage grew three to four times faster in developing markets than in mature markets. We see this in Kenya, a country where the average annual income is barely above $1,000 USD. An enormous 58 percent of adults regularly make payments with their mobile devices.

But these people aren’t using credit cards. Contactless payment tied to mobile devices and cash balances is becoming the new standard. They don’t use traditional bank accounts and may never make the switch as wealth grows.

Prospects for credit card growth in the rich world are grim.

A recent Forbes  analysis of AfterPay explains why credit use is declining in the developed world:

“In a 2016 survey, only one in three adults aged 18 to 29 owned a credit card. “The financial crisis scarred a generation into not doing stupid things with their finances,” says Matt Harris, a well-known fintech investor and managing director at Bain Capital Ventures. “They’re kind of scared with credit.” Today in Australia, AfterPay average customer is 33 years old. Eight of ten are women.

Many retailers joined Afterpay because, when they started offering the service, they saw customer order sizes jump meaningfully, from 20 to 50%, Molnar says. Some retailers quickly saw one-quarter of their online orders processed through the pay-later service shortly after turning it on.”

Credit cards are also under assault from an unfriendly regulatory environment. In its 2017 annual report on world payments, Capgemini argues that the regulatory requirements of Basel III, the international regulatory framework for banks, and the interchange fee cap in Europe are increasing the cost of issuing credit cards.

But technology is increasing the utility of one of humanity's oldest, greatest inventions: cold, hard cash.

Venmo killed the radio star: Digital makes cash easy to use

If you don’t know what Venmo is, you are over 40, or not living in America.

Ask any young person to open the app called Venmo on their phone and you will see a new financial world defined by an ability to easily send precise amounts of cash. The very nature of the mechanical, mundane way we spend money together in a social setting has changed radically in the span of fewer than five years.

Why? Because Venmo and digital technology expose a painful flaw in the design of one of humanity’s earliest innovations—cash—that hasn’t fundamentally changed since its invention 7,000 years ago: It has a pretty lousy user experience. The denominations are generic and you can’t split them up without sourcing smaller currency amounts from third-parties and arranging a complex combination of variously denominated bills and coins (that is, if you can even get the variety of coins you need).

AfterPay is groundbreaking because it makes cash easier to use by making it work like credit.

Across the planet, at all levels of household wealth, credit card use is either in decline or isn’t being used at all. Before modern credit cards existed, 70 years ago, cash was the dominant payment method in the world.

The introduction of credit cards was revolutionary in that it helped consumers pay for common goods that exceeded their available cash holdings. But with the help of modern technology, the main drawback of cash is being mitigated by companies like AfterPay. And because most of the world remained a cash society while the West got rich, digital technologies are now dominating developing countries as their wealth and purchasing power grows.

That, plus the decline in credit card use in the developed world, means that solutions like AfterPay are on the path to dominate digital commerce across the globe.

World Payments Report 2017, Capgemini
IMF World Economic Outlook (WEO) Update, January 2016
The World's 2 Billion Unbanked, in 6 Charts, Business Insider
Why are mobile payments so successful in developing countries?
How Millennials Became Spooked by Credit Cards, New York Times