Pay-later schemes: What retailers need to know

Why are we talking about this now?

Furniture etailer Worldstores.com has partnered with payday loan company Wonga to offer customers a new online payment tool which allows them to spread the cost of a purchase over three months. It is the second retailer to use the service following a trial with The Cotswold Company which began in December.

What pay-later schemes exist and how do they work?

The Worldstores.com service involves consumers paying an upfront fee of 7% to Wonga. After that, repayments are made once a month for three months. It is seen as an alternative to credit cards. The tactic has been popular with catalogue and big ticket retailers from DFS to Currys for many years. Currys offers shoppers a Buy Now, Pay Later service which allows them to pay a one-off £25 settlement fee and spread the cost of the product over 36 months with no interest to pay.

What are the benefits?

The payment option allows shoppers to have the items they want instantly, regardless of the money in their account that day. During the recession, the method has been increasingly popular as shoppers opt to delay full payment for an item until either their personal finances improve or they have been paid. For retailers, it allows them to reach a new customer base that wants an alternative to credit cards.

Manchester Business School retail analyst Tarlok Teji says: “If you want to buy a sofa or a TV at 0% interest it’s a perfectly sensible option. People feel they are getting a good deal and it’s great for the consumer psyche.”

What are the drawbacks?

The payment option often sparks controversy, with some loan companies, and the retailers that partner with them, being criticised for encouraging people to rack up debt, as it is often offered to shoppers who have been rejected by credit card firms due to a poor credit history. Store groups including rent-to-buy retailer BrightHouse have come under fire for their high interest repayment terms.

What is their future?

Wonga is in advanced discussions with a number electricals, sports, and home and garden retailers about adding PayLater as an online payment option. As the depressed economy continues to pile pressure on shoppers’ disposable incomes, pay-later schemes show no signs of dying out. Teji adds: “As long as consumer confidence is low then people will not make big upfront purchases.