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Previous ArticleeLearning technology and the opportunities with paymentsNext ArticleFrom Green Space to Digital Place

Pay later solutions: the modern-day layaway?

Layaway was once one of the most popular schemes for paying in instalments, but came with the downside that you had to pay off the total cost before taking items home. Now there is another solution.

It was the decade of swing, radio dramas and screwball comedies. But it was also the midst of the Great Depression.

Life was tough in the 1930s. Unemployment hit unprecedented highs, peaking at 24.75% in 1933. Money was scarce. And consumers could barely afford everyday necessities, let alone luxuries such as cars or fridges — at the start of the decade only 8% of households had one of the latter.

So, retailers came up with a revolutionary idea.

What if you could reserve an item, pay it off over a number of months and collect it once you had settled the purchase price in full?

The idea caught on. And layaway was born.

From necessity to mass appeal

Layaway may have been born out of necessity, but it quickly grew in popularity. And with good reason.

From a consumer perspective, layaway made it easier to purchase big ticket items. Consumers no longer had to fork out $80 or $100 (equivalent to about $1,504.39 in 2019 money) all at one time. Instead, they could spread the cost through monthly payments.

More to the point, while you did have to put down a deposit and pay a service fee, no interest applied. And if customers couldn’t keep up with payments, they could often get their money back less a small fee that covered storage costs.

Layaway was a win-win for retailers too. They only parted with the item once they received payment in full, which eliminated the risk of bad credit. And if someone stopped making payments, they could easily add the item back to their active stock list. 

Layaway quickly became available anywhere and everywhere. And by the 1960s and 70s, it was par for the course for consumers, whether it was for a big purchase such as a new home appliance, seasonal expenses like Christmas presents, or even some day-to-day items.

“If the Great Depression gave birth to layaway, the 2008 financial crisis kickstarted its resurgence.”

The rise of instant gratification

The first credit card, called Charg-It card, launched in the US in 1946. But it was in the 1980s that credit card usage exploded.

In the interim, IBM engineer Forrest Parry invented the magstripe, which made payment as simple as swiping your card. And banks started removing annual fees and introducing 0% introductory interest rates and rewards in a bid to attract more users.

These efforts, of course, were a resounding success. According to our latest Lost in Transaction data, credit cards remain as popular as ever, with 51% of consumers who took part in our market research saying that they had used one in the past month.

By contrast, layaway’s popularity went downhill. Yes, credit cards attract interest, which makes purchases more expensive. But for a majority of consumers, the allure of instant gratification far outweighed this added cost. As a result, layaway programs all but disappeared during the 1990s and early 00s.

Coming full circle

If the Great Depression gave birth to layaway, the 2008 financial crisis kickstarted its resurgence.

As retail sales during the 2008 Christmas shopping season hit 35-year lows, Kmart bucked the trend, registering better than expected results largely thanks to its 600,000 layaway customers.

Kmart’s success spurred other merchants to bring layaway back. Case in point, Walmart, which closed its program in 2006, re-started it in 2011. And, ten years later, a survey found that 33% of shoppers planned to use layaway to spread the cost of the Christmas season.

Bridging the gap

While layaway may be enjoying an uptick in popularity, there are also bigger forces at play.

Terry Rolocek, head of Shop Your Way Financial Services at Sears Holdings Corporation, observes that layaway appeals to a very specific type of consumer. “Layaway,” he says, “is more of a planning customer. More of a budget-conscious customer.”

But it’s not just forward planners who are looking for affordable ways to spread the cost of their purchases. Clearly, there’s a growing appetite for cheaper financing across the board. And it’s an appetite that may be satisfied without forgoing the thrill of instant gratification.

“Pay later solutions aren’t just great for spreading the cost of expensive items, managing cashflow and avoiding overspending; they also allow consumers to take their purchases home straight away.”

From pay first to pay later

According to our research, 38% of consumers are now using pay later solutions — payment schemes that allow you to take your item home now but defer payment to a number of equal instalments. While these payment products do sometimes charge interest, these can be cheaper than credit card APRs. This means that the cost is not only perceived by consumers as being more manageable due to being split into smaller payments, overall the method might be cheaper.

More to the point, pay later solutions aren’t just great for spreading the cost of expensive items, managing cashflow and avoiding overspending — the benefits that made layaway so popular in the past. They also allow consumers to take their purchases home straight away, giving them the instant gratification they crave but without the associated costs, meaning that the consumers get the best of both worlds.

And this benefit  to consumers is being recognised by retailers as well – 16% plan to start accepting them in the next two years. With increased adoption by retailers, pay later solutions could just become the layaway replacement the modern consumer needs.