Fintech Startups Target Millennials With Installment Plans To Buy Clothing

Installment payment plans to buy jeans and t-shirts?

While that idea may sound crazy to some people, it is a new offering from a number of fintech startups that are targeting millennials with the option to pay for clothing items such as a pair of blue jeans using installment payment plans.

Australia’s Afterpay offers installment plans in the U.S. and Canada, while San Francisco startup company Affirm founded by PayPal (NASDAQ: PYPL) co-creator Max Levchin, gives shoppers the ability to pay for a $15 t-shirt using an installment plan. Another company, Square (NYSE: SQ), announced its own installments plan in October, as did Swedish payments company Klarna, which has teamed up with H&M to offer installment payment plans for clothing items in 14 North American markets.

The companies say they’re targeting millennial shoppers by filling a gap between credit cards and store credit, which require paperwork and a strong credit rating. Perhaps mindful of the new competition, established credit card companies such as Discover warn that these upstart fintech companies could run into trouble should the economy sour and defaults rise.

Consumers can apply for installment plans via an app and learn whether they’ve been approved in seconds. They click a button at checkout on the websites of participating retailers if they want to pay by installment. E-commerce analyst Brendan Sweeney says about 20% of consumers will be enticed by the ability to pay for inexpensive items in installments rather than all at once. Many installment plans charge customers no interest.

The fintech companies are pushing into consumer finance as traditional credit card companies pull back, citing rising defaults. Affirm and Afterpay typically approve more than 80% of applicants, compared with about 50% for store credit cards.

Afterpay Touch Group Ltd. says it is targeting millennials who either abandoned credit cards after the 2008 recession or have never taken one out. The company charges no interest, instead collecting a fee of as much as 6% of a sale from the retailer.

Afterpay says that it works with 20,000 merchants globally—including 1,000 online in the U.S. where the company has signed deals with Urban Outfitters, Anthropologie and Free People. Afterpay says it has global sales of more than $3 U.S. billion a year.