Retail’s last hope? Macy’s, others offer buy now and pay later financing

Retailers including Macy’s Inc (NYSE: M), Gap Inc (NYSE: GPS), and even higher-end chains like Neiman Marcus are making a bet that they can attract new clients via buy now, pay later options, The Wall Street Journal reported.

Retailers love credit card purchases

Retailers that offer store-branded credit cards love it when consumers use their cards to make a purchase. In Macy’s case, almost all of its operating profit in the current fiscal year will come from credit card income from its store and co-branded cards.

In fact, shoppers that use store-branded credit cards are the most profitable kind of consumers. Credit and financing fees extended to active customers have helped offset sales declines.

But now the company might have no choice but to evolve and offer less attractive solutions to customers that don’t have or don’t use credit cards, according to WSJ. In fact, retailers like Macy’s that already jumped into the buy now, pay later space have to give the financing provider a cut of the sale.

Macy’s reported its fourth quarter results in late February. Here is an Invezz.com summary of how the retailer is performing.

Offer what the customers want, or else lose them

On one hand, buy now and pay later options are very undesirable compared to store-branded cards. But on the other hand, if a retailer doesn’t offer consumers such an option they will shop elsewhere.

Macy’s CEO Jeff Gennette told WSJ in an interview that its younger customer base has been demanding these options. And the CEO acknowledged “if we didn’t have it, they might have gone elsewhere.”

Macy’s hopes to convert its new buy now, pay later customers into users of its branded card by offering discounts and perks like free shipping.

How to play the space

Affirm Holdings Inc (NASDAQ: AFRM) is one of the public ways investors can gain exposure to companies that operate buy now, pay later solutions. Affirm’s stock opened for trading for the first time ever on Jan. 13 at $49 and by the end of February, shares were flirting with the $100 per share mark.

Affirm and its rivals are operating in a relatively new space. Buy now, pay later options are expected to grow its market share from 1.6% of all North American online transactions in 2020 to 4.5% by 2024.

The payment option has attracted a loyal following among millennials while its exposure to baby boomers is close to zero. 

The fintech companies generate their revenue through a cut-of-the-sale transaction that often sets a retailer back double or triple what they would pay a credit-card processor, WSJ noted. The companies can also generate late fees although many offer generous terms. In Affirm’s case, it doesn’t charge any late fees while less than 9% of rival Afterpay’s income is derived from late fees.