Amazon jumps on the buy now/pay later train

Buy now/pay later financing has emerged as a major alternative to credit card borrowing since the pandemic began, and now Amazon is getting into the act through a partnership with the fintech Affirm.

The e-commerce giant began testing Affirm's point-of-sale credit product on Friday in the U.S., and plans to roll it out more broadly in the coming months. Amazon's customers can split purchases of $50 or more into monthly installments.

Fintechs such as Affirm, PayPal, Klarna and Afterpay offer buy now/pay later loans that allow consumers to split large purchases into a series of payments, usually over three or four months. The providers pitch the product as having simpler terms than a credit card, as well as an opportunity to avoid revolving debt. Affirm's clients include Walmart, Amazon's primary rival, and Peloton.

The buy now/pay later provider pays the merchant upfront, with the consumer paying the installments to the provider. Affirm charges a fixed amount of interest that the consumer agrees to at the time of the loan, which the firm says is a way to avoid compounding debt. Each transaction is underwritten when a consumer uses Affirm at checkout.

PayPal is the market leader in buy now/pay later lending, controlling about at 45%, according to research published by Arizent, American Banker's parent company.

Affirm has about a 13% market share, but its partnership with Amazon, the nation's largest online retailer, should help it narrow the gap with PayPal. Most buy now/pay later transactions take place online, making Amazon a natural fit for the service.

Buy now/pay later lending has become controversial as regulators in the U.K. and California are considering tighter controls following studies that have shown borrowers can accumulate debt quickly. Nonetheless, several tech giants are moving into the business, and investors are flocking to it. Square recently announced it is buying Afterpay for $29 billion, and Apple recently debuted a buy now/pay later product of its own. Meanwhile, Klarna, a Swedish lender, has raised close to $2.3 billion in three separate funding rounds since last September.