IKEA takes a cautious first step into buy now pay later loans

IKEA in Burbank, California
IKEA, which has 52 U.S. locations, plans to add eight new stores and nine order-and-pickup locations in the next three years.

Troy Harvey/Bloomberg

As buy now/pay later fintechs edit their strategies to cope with changing economic trends, IKEA is launching its first installment-loan option through Block’s Afterpay unit, with a modest strategy unlikely to draw any fire from regulators as BNPL rule-making looms.

IKEA shoppers may opt for instant financing on purchases from $40 to $500 through Afterpay at 0%, with loans repayable in four equal payments over six weeks, the companies announced Tuesday. The loans are available online or at any of IKEA’s 52 U.S. stores, according to a press release.

The move appears to aim for the middle ground in the increasingly competitive BNPL lending arena, by offering consumers the simplest form of zero-interest “Pay in 4” BNPL loans that gained broad popularity during the pandemic.

After the pandemic, many BNPL fintechs began promoting an expanding range of interest-bearing loans for thousands of dollars whose terms extend up to 60 months, raising concerns about consumer risk. Some observers expect the Consumer Financial Protection Bureau to act soon in establishing formal guidelines for BNPL lenders to report consumer borrowing activity, among other details. 

IKEA — which plans to add eight more U.S. stores plus nine pickup-and-order locations in the next three years — is strictly offering its zero-interest loans at this time, a spokesperson for the merchant said. 

Offering unsecured loans at 0% makes less sense for many BNPL providers in an atmosphere of rising interest rates, where funds are no longer cheap, analysts say.

Many BNPL fintechs are managing this challenge by continuing to offer 0% “Pay in 4” loans that are key to building relationships with consumers, while they promote an expanding range of interest-bearing loans like those Afterpay offers through other merchants, said Ariana-Michele Moore, a retail banking and payments advisor with Datos Insights. 

“In the merchant-fintech model, a merchant like IKEA will pay a percentage of the transaction to Afterpay which may be higher than credit card interchange. In the fintech-consumer direct model, it makes more sense to broaden the loan options for recurring customers,” she said. 

The deal could also give IKEA shoppers broad exposure to Afterpay, Moore said.

Afterpay last year announced an expansion of its interest-bearing loans through a monthly repayment plan offered through merchants, alongside its 0% interest Pay in 4 programs.

BNPL lending is on track to be a key financing option during the fourth quarter, with Affirm recently announcing the official rollout of its physical Affirm Card enabling customers to finance purchases with BNPL loans on the spot in stores. Klarna launched a physical card last year.

Separately, Citizens Financial Group last week announced a new Citizens Pay BNPL financing deal with Trek Bicycle, and earlier this month Affirm launched a partnership with Booking.com, extending its BNPL loans across online travel brands that also include Kayak, Priceline and Agoda. 

The U.S. BNPL market is on track to grow at a 14.8% annual rate for the next five years, according to eMarketer. 

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