4 startups are changing the way millennials pay for brands like Casper and Warby Parker and have attracted investors including Andreessen Horowitz and Snoop Dogg

• Online shoppers have a new option when it comes time to check out: Buy now, pay later.
• Affirm, Afterpay, Klarna, and QuadPay are offering low-cost alternatives to credit cards for shoppers that don't want to pay all at once.
• While Affirm charges between 0 and 30% interest, startups like Afterpay, Klarna, and QuadPay offer no-interest installment plans — so if shoppers pay installments in full and on time, there's no cost.
• Instead of customers bearing the cost of the financing, retailers pay the startups a percentage of the transaction.
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A buzzy cohort of startups are trying to redefine how shoppers take out credit at checkout.

Retailers have traditionally offered discounts and promotions in store and online for shoppers who sign up for a store's credit card. And retail-branded credit cards, like those offered by Amazon and Gap Inc., come with rates as high as 30%, according to Creditcards.com's 2019 retail-card survey.

But the number of these cards in circulation has declined steadily since 2009, especially among millennial shoppers. Of those who signed up for a store card, only 19% were millennials ages 18 to 34, according to the survey.

Now a number of well-funded startups are offering subscriptionlike installment plans to appeal to millennial shoppers who might not want to apply for credit cards from their favorite stores.

Afterpay and Klarna, for example, offer no-interest installment plans at retailers including Casper, Delta Air Lines, and H&M. Some, like Affirm, charge interest based on a user's credit worthiness.

And their ads are everywhere. Like many startups, these buy-now-pay-later players have taken to New York's subways to reach the masses.

Klarna launched a campaign last year with one of its investors, Snoop Dogg, renaming him "Smoooth Dogg" and advertising "smoooth payments."

These installment options have proven attractive to shoppers, especially online.

Affirm reported over $2 billion in loans in 2018. Afterpay issued over $5 billion in loans in a year and has 4.6 million users globally, according to its 2019 financial year-end results. And Sweden's Klarna, which launched in the US in 2015, said it was adding 6 million US customers every year.

Retail cards may be losing popularity, but general credit and debit cards are still prominent. Payments made with debit and credit cards grew 9% every year between 2015 and 2018, according to the Federal Reserve. 

Here's a look at some of the startups that are raking in venture-capital money and trying to change the way consumers spend online.

Affirm offers short- and long-term loans based on a user's credit history at the point of sale

Affirm, founded by PayPal cofounder Max Levchin, offers a no-fee point-of-sale (POS) financing option at retailers like Casper, Delta Air Lines, Warby Parker, and Walmart. 

Affirm partners with e-commerce retailers to offer POS loans during online checkout. And if Affirm isn't set up with a retailer, users can use Affirm credit or its app. Affirm is similar to a credit card in that it charges interest at an annual percent rate between 0 and 30%, depending on a user's credit. 

And because it charges interest, Affirm is subject to US regulations like the Truth in Lending Act, which requires transparency from lenders around the terms and cost of credit.

Affirm doesn't charge late fees, and there is no deferred interest, but it does report to credit bureaus, so late payments can affect users' credit scores. Depending on the size of the purchase and a user's credit profile, Affirm's loans are typically offered in 3, 6, or 12 month terms, but longer-term loans are available at select merchants.

Affirm has raised $800 million to date from investors including Andreessen Horowitz, Lightspeed Venture Partners, and Spark Capital, and has a $2.9 billion valuation, according to an Affirm spokesperson. TechCrunch reported last year that Affirm was raising as much as $1.5 billion.

No-interest options

Afterpay, Klarna, and QuadPay offer shoppers the ability to split online purchases into no-interest installments.

In a crowded market, they all compete for retailer partnerships. By offering the installment plans, these startups say that retailers can increase sales and minimize cart abandonment. None of these startups charge interest, which means the cost of the financing is shifted onto merchants, who pay the installment provider a percentage of each transaction.

And they seem to be everywhere in online retail, giving shoppers the option to finance things like art, apparel, and makeup.

For retailers that don't have one of these startups embedded in their checkouts, shoppers can still access installment financing through the startups' apps.

Australia's Afterpay is growing fast in the US

The Australian startup Afterpay is growing fast and establishing partnerships with retailers like Adidas, J.Crew, and the Urban Outfitters group that includes Anthropologie and Free People.

Afterpay doesn't run a credit check to determine a user's eligibility, and it doesn't disclose exactly how it makes its decisions. However, according to its website, a user's payment history with Afterpay can influence whether a transaction gets approved. 

With Afterpay, if a user misses a payment, they are unable to make any more purchases with Afterpay until the payment is settled. Afterpay offers a grace period, which is typically about 10 days, according to its website, and it charges users a late fee if payments aren't made within the grace period.

A fee of $8 is applied to each late installment, but total fees don't exceed 25% of the total purchase.

Afterpay has grown fast. It launched in Australia in 2015 and went public in 2017. In 2018, it launched in the US, where it now has over 2 million customers. According to its 2019 financial year-end results, about 5% of transactions incur late fees, which made up 19% of Afterpay's income, down from 25% in 2018.

Klarna, the unicorn backed by Snoop Dogg, has raised over $1 billion

Klarna was founded in Sweden in 2005 and launched in the US in 2015. It partners with Asos, Bose, and H&M, among others, to offer customers the ability to repay in interest-free installments within 30 days. Klarna also offers an app for users to secure credit at nonpartner retailers.

With Klarna, if you are late on a payment, it offers a two-day courtesy period. If you're then still unable to pay, you'll be in default and won't be able to use the service again, according to its website.

Klarna has raised over $1 billion to date, with its latest fundraise of $460 million in August last year, bringing its valuation to $5.5 billion. Investors include Dragoneer Investment Group (Chime and Compass), Snoop Dogg, and Visa.

QuadPay is one of the newer players on the scene

QuadPay, like Afterpay, offers four-piece installment plans for online purchases. There's no interest, but a $7 late fee is charged for an overdue installment payment. 

QuadPay is offered at retailers like Fashion Nova, Ugg, and S'well.

QuadPay doesn't check a user's credit report, so credit scores aren't affected by applying. But the company does not disclose any information about how it assesses a user's eligibility, according to its website. 

Late payments can be reported to credit bureaus, so not paying on time could influence users' credit scores.

QuadPay was founded in 2017 and raised its seed round from Global Founders Capital in 2018.

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