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Jeddah - Yasmine El Tohamy - OHIO: Browsing online during lockdown, Jessica Friend spotted a pair of Ray-Ban sunglasses she liked, but the price tag made the 30-year-old Ohio resident think twice.

What persuaded her to click “buy,” Friend said, was the short-term credit offered by Afterpay, which split the $260 payment into four interest-free instalments.

Afterpay is among a handful of alternative credit firms that offer small loans, mostly to online shoppers, and make their money by charging merchants a 4-6 percent commission.

These buy-now-pay-later (BNPL) firms have benefited from a shift to online shopping during the coronavirus crisis in countries including the US, where state aid has also boosted retail sales.

“I’m more inclined to use them because they make it easier to afford to get the things I want all at once ... and when I want to splurge on something,” Friend said of the loans. Some investors are now betting shoppers will stay away from stores as coronavirus cases rise again in several countries around the world, boosting business for BNPL firms.

But swelling subscriber numbers may also increase bad loans, mainly among first-time users who are more likely to default.

And as job losses rise and government aid ebbs, the business model will face its first real test in a recession.

“Much still hinges on any virus second waves and government wherewithal to keep boosting demand,” said Andrew Mitchell of Ophir Asset Management which owns shares in Melbourne-based Afterpay, whose market value has risen to $12.55 billion from over $100 million 4 years ago.

While a move to online shopping was underway before the pandemic, the shift has accelerated under lockdown and Afterpay signed up more than a million new active US customers between March and early May, taking its overall base there to 9 million.

Meanwhile, retailers desperate to move merchandise have also become more receptive to partnerships with BNPL firms, which unlike credit cards or mortgages, make loans instantly.

Klarna, Europe’s biggest fintech start-up, said that since March enquiries from retailers who may want to partner with it jumped by 20 percent on average globally.

With 7.9 million US subscribers, Sweden’s Klarna has since signed up outdoor gearmaker The North Face, Disney’s streaming service and cosmetics retailer Sephora.

Most of the growth has been in higher-margin discretionary spend categories such as fashion and fitness gear, said Puneet Dikshit, a McKinsey partner in New York, who expects the sector to generate $7 billion to $8 billion in volumes this year in the US, growing by more than 150 percent annually.