Suppose you were deliberating whether or not to purchase a US$1,500 television online. Instead of paying the full amount upfront, you’re now offered an option to pay just one-third of the price upfront, and spread out the remaining sum over the next two months. It’s a free-to-use option with zero interest, assuming subsequent payments are made on time.
For many, the choice could mean the difference between a purchase and an abandoned cart.
Hoolah, a Singapore-based startup that offers such installments, says its service has increased average transaction values by up to 50% and conversion rates for merchants by 35%, on average.
Founded in 2017, the company is part of a growing trend of buy-now-pay-later platforms looking to tap into the millennial market – one of the fastest-growing segments of ecommerce globally.
The firm recently announced an eight-figure series A fundraise, counting investors like Genting Ventures – the subsidiary of multinational firm Genting Group – and former Lazada CEO Max Bittner. The investment will go into expanding its presence in Malaysia and building out its omnichannel capabilities.
Its partnership with Genting Group could also propel its ambitions to expand into the travel and leisure segments, as the Malaysian conglomerate operates hotels, theme parks, and cruise lines across the globe.
‘Paying later’ in developed markets
For Hoolah co-founders Stuart Thornton and Arvin Singh, the millennial demand for credit is universal. “It’s not always about affordability. It’s about cash flow for consumers, about the younger generation shifting from perhaps a desire to use debit cards rather than credit cards for transactions,” says Thornton, who is also the startup’s CEO.
US-founded Affirm, which serves over 3,000 merchants, says that half of its customers are millennials or Generation Z.
Startups like Hoolah essentially offer what credit cards already do, but are free to use. Zero-interest installment plans also appeal to consumers’ unwillingness – and sometimes inability – to pay for big-ticket items upfront. Late-payment charges for these platforms are often more transparent, too.
That’s a less risky option compared to an average 20% charge that credit cards in Singapore can incur for late payments. Add to this the compound interest structure that credit cards use, and customers can quickly spiral into debt.
Other entities such as furniture stores are now providing installment plans as well. Courts, a retailer for furniture and electronic products, offers this option, but it charges interest rates of at least 11% per annum. Customers can, however, opt to spread their payments over up to 60 months.
Another example is Australia-based furniture retailer Harvey Norman, which provides zero-interest installment plans for purchases of S$500 and above, though this is limited to selected credit cards. Installment plans for consumer goods beyond furniture stores are uncommon.
Hoolah’s service, on the other hand, expands installment payment to new consumer verticals – it partners with over 300 merchants from fashion and accessories, electronics, furniture, to skincare. It limits installment payments to three months.
The startup allows customers to pay using any Mastercard- or Visa-issued card from any bank.
Hoolah’s merchants also absolve themselves from any credit and fraud risks associated with transactions and obtain full payments upfront for a fee, which the startup declined to disclose. As a benchmark, Melbourne-based pay-later firm Afterpay charges merchants an average of 3.8% per transaction, while Affirm charges merchants between 2% to 3%.
Despite the traction of pay-later companies worldwide, profitability remains in question.
Afterpay, which has operations in Australia, New Zealand, the US, and the UK, has seen impressive top-line growth: Total income for the company surged 96% year on year to A$220 million (US$142 million) for the first half of the fiscal year ended December 2019.
This came as underlying sales, or gross merchandise product, across the platform grew 106% and active customers more than doubled to 7.3 million year on year, for the same period. In August last year, the company claimed to be onboarding 12,500 new customers a day.
But costs have remained high in the first half, with operating expenses more than tripling to A$80.6 million (US$52 million), while earnings before interest, tax, depreciation and amortisation (EBITDA) decreasing by 51% to A$6.8 million (US$4.4 million) from the same period last year.
“The result compares favorably to our [expectations] broadly – except for EBITDA – with [volume] and customers ahead, stable merchant fee margins, and improving loss rates,” said RBC Capital Markets analyst Tim Piper.
Hoolah did not disclose its gross merchandise volume but said the annual volume of transactions it processed grew 15x between 2018 to 2019.
Enter the payments giants
Last year, Afterpay entered into a strategic partnership with US payments giant Visa to support the development of innovative solutions and drive business growth in the US. The development came after Afterpay reported almost A$1 billion (US$654 million) in transaction volumes in its full year of operations in the US.
Visa had in June last year launched its own installment payment program which let participating issuers and merchants offer installment payments to their customers with their existing Visa cards.
“To me, this is a serious problem for Visa,” The Motley Fool analyst Taylor Carmichael said in a note. “If Afterpay wins over millennials (as it is doing), well, that’s the future. Visa has arguably validated the Afterpay model by announcing in late June that it is going to enter this business as well.”
He predicts that a large financial company like Visa, PayPal, or Square, or even one of the big US banks will acquire Afterpay down the line.
For its part, Mastercard is forging strategic partnerships with banks and fintech companies as well. In Australasia, Afterpay offers its interest-free installments via a tie-up with the payments giant to share technology, data, and service capabilities, Sandeep Malhotra, executive vice president for Mastercard’s products and innovations team in Asia Pacific, tells Tech in Asia.
Despite this, Hoolah is confident that its localized approach in each market gives it an edge over these payment firms.
“We have a deep relationship with the consumer – that’s where partnerships with these investors certainly can be helpful for them as well,” Singh says.
Currency converted from AUD and SGD to USD: A$1 = US$0.65; SGD$1 = US$0.71