The "buy now, pay later" industry is finally having its moment in the United States, following a surge in adoption due to the Covid-19 pandemic. "Buy now, pay later"—the option of paying for goods in installments—grew 215% year over year in the first two months of 2021 in the United States, according to an analysis from Adobe . In that same two-month period, consumers spent $121 billion online, which is 34% growth year over year. The service, which gives shoppers financial flexibility at checkout, has also helped merchants. For retailers, "buy now, pay later" solutions often lead to higher average order volumes. Consumers using these installment payments place orders that are 18% larger than orders placed with other payment methods, Adobe found. CNBC identified two emerging companies in the installment payments space that have quickly gained a hold of the U.S. market, per Forrester. Since 2019, Affirm usage doubled, while Afterpay usage in the U.S. has tripled, making them the most popular players so far. Affirm Founded by PayPal co-founder Max Levchin , Affirm has become a standout pick for its point-of-sale loans. Affirm allows customers to finance online purchases that can be paid back in monthly installments without accruing interest. For example, a person can purchase a $1,895 Peloton bike and pay $49 a month for 39 months. Morgan Stanley analyst James Faucette said at the firm's Tech, Media & Telecom conference in March that in a survey of the top 500 e-commerce merchants in the U.S., Affirm was "picking up merchants much faster" compared to some of the other "buy now, pay later" providers. Affirm last said it works with 6,500 retailers, including Nike, Wayfair and Walmart , and is used by more than 6.2 million people. The installment-payment provider profits when it helps a merchant make a sale. It also earns interest income on loans it buys from bank partners and some consumer loans. The rate it charges varies by consumers' creditworthiness, but often starts at 0%. Affirm went public in January and was priced at $49 per share. It's currently trading around $71 per share. Consider that the company started trading at $90.90 when it debuted on the Nasdaq on Jan. 13. "We think the on-going rotation out of growth stocks and the pending lock-up expiry (~140M shares) could remain a source of near-term volatility for the stock," Bank of America Securities analysts said in a March 25 note. The analysts initiated coverage of the company with a neutral rating and a $78 price objective. Still, the bank said Affirm is "well positioned to deliver 30%+ top-line growth for the next several years." "When you consider valuation here it's not surprising Affirm could get caught up in that broader draw down," said Andrew Jeffrey , managing director at Truist Securities. He said it's "likely going to be a volatile stock in valuation given the nature of the market, but we think Affirm is going to be a standout in ['buy now, pay later']." Afterpay Founded in 2014, Afterpay is one of Australia's hottest technology stocks. The company trades mainly in Australia, but trades over-the-counter in the U.S. Shares are down less than 1% for 2021, but are up about 590% for the last 12 months, according to FactSet. The "buy now, pay later" payments platform is taking a hold on the U.S. market. Afterpay usage in the U.S. has more than tripled since 2019, according to Forrester data. The company entered the market in 2018. Afterpay allows consumers to split up the cost of their purchases over regular, interest-free installments. Instead of paying $98 upfront for a pair of Levi 's, for example, a person has the option to pay four installments of $24.50. Afterpay said in its most recent financial report that it had more than 8 million active customers in North America. Meanwhile, U.S. active customers grew 20% from the last quarter. "In terms of North America, we've seen very strong sustained growth. The U.S. was the largest contributor in Q2 to underlying sales," co-CEO Nick Molnar said on the company's most recent earnings call. Afterpay works with more than 17,900 retailers in North America , including Bed, Bath & Beyond , Lululemon and Ulta , and a bevy of smaller direct-to-consumer players. The payments platform makes its revenue from the merchant fee it charges shops. Merchant partners receive the amount of each purchase—minus this fee—up front, the company said. Afterpay takes on the risk of repayment and can collect late payment fees. Don't discount the competition "We expect the competitive intensity within the ['buy now, pay later'] market to continue increasing, from pure-play BNPL providers (Afterpay, Klarna, Sezzle), PayPal , and traditional card issuers," the Bank of America Securities analysts said. In particular, Klarna said in early February it hit a record 15 million customers in the U.S. The company added, which is eyeing a public listing in Europe, that 1 million U.S. customers have joined Klarna each month since October 2020. PayPal is also one to watch, considering its access to troves of data, according to Lily Varon, senior analyst at Forrester. The company announced its installment payments option last September. PayPal's name recognition can give it an edge over competitors, according to a research note from Atlantic Equities. "PayPal has already seen a meaningful 10% increase in branded share of checkout when its installment product is presented up stream so we view this as a $2bn revenue opportunity," the firm said. "BNPL should add a few points to PayPal's revenue growth in the next few years." Traditional institutions are also joining the space. Visa and Mastercard announced partnerships with payments processors to create installment options, while American Express launched its version of the service, known as "Plan It." Citi and JPMorgan Chase are also offering similar products. The names American consumers already know for payments processing and banking could also be the ones to convert consumers to this payment method. "I do think that customer expectations are shifting and there's a potential for a permanent shift, but I'm not sure it's going to come from these fintech start ups, my guess is it's going to come from maybe the PayPal, maybe the card networks, maybe the banks," Varon said. Subscribe to CNBC on YouTube.
