This article has been reviewed according to Science X's editorial process and policies. Editors have highlighted the following attributes while ensuring the content's credibility: "Buy now, pay later" plans—which allow consumers to split purchases into a handful of interest-free installments—have become a common way for Americans to pay for everything from furniture to groceries. New research from Olin Business School at Washington University in St.
Louis suggests the increasingly popular payment option can have consequences beyond the checkout screen—influencing retail prices, inventory decisions and the financial burden on consumers. The study, "Buy Now, Pay Later: The Hidden Effects of Consumer Liquidity on Retail Prices and Inventories," forthcoming in the journal Management Science, by Naveed Chehrazi, Panos Kouvelis and Wenhui Zhao, examines how pay-later financing changes the behavior of both consumers and retailers. The paper is currently available on the SSRN preprint server.
The central insight is straightforward: What consumers are willing to pay is not necessarily the same as what they can afford to pay at a particular moment. "The 'buy now, pay later' button does not target how much you are willing to pay for an item. It targets what you are able to pay right now," said Kouvelis, the Emerson Distinguished Professor of Supply Chain, Operations, and Technology and director of The Boeing Center for Supply Chain Innovation.
In 2025, an estimated 91.5 million Americans used a pay-later plan, according to data from LendingTree. The Federal Reserve Bank of Richmond estimated that pay-later purchases totaled about $70 billion that year—roughly 1% of U.S. credit-card spending. Offering installment payments comes with a cost for retailers, the researchers warn.
Pay-later companies such as Klarna, Affirm and Afterpay pay retailers upfront and then collect installment payments from consumers. In exchange, the financing company takes a portion of the transaction. Retailers accept that cost because offering installment payments can attract customers who otherwise might abandon their purchases and can increase the size of their shopping baskets.
However, that means some retailers raise their sticker prices to compensate for the financing cost. As a result, the store effectively serves two groups of customers from the same inventory: consumers who pay the full price and those who finance their purchases. To offset the financing company's fee, the retailer may raise its sticker price, meaning cash-paying customers can end up subsidizing customers who use pay-later.
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