For retailers that aim to attract, acquire, and retain the largest pool of customers possible, a key prerequisite is making it easy for plenty of people to purchase from them. Thus they locate in readily accessible locations, establish online and mobile channels, and so forth. But perhaps even more essentially, these retailers need to offer a wide range of options for customers with varying payment preferences. A lot of attention thus gets paid to tech-savvy consumers who demand cutting-edge digital wallet capabilities. But another large consumer segment requires more fundamental payment options.
That is, even as retailers extend and innovate with technologically sophisticated methods to purchase goods, they also are providing a new version of old-fashioned layaway plans, in the form of buy-now-pay-later options.
Historically, layaway offered an appealing means for people to purchase expensive, durable goods such as appliances or large consumer electronics. For consumers without several thousand dollars on hand (i.e., most of them), but an immediate need for a new refrigerator for example, a retailer’s layaway plan gave them a way to access the products they needed right away, but pay for those items over time. The interest rates were usually reasonable, so it made sense for consumers to embrace these plans.
The expanded uses of credit cards made such options largely obsolete; most people could just charge a big purchase. But then again, credit cards do not cover everyone, including an estimated 53 million U.S. adult consumers who have not established traditional forms of credit scores for themselves. As a result, they do not qualify for credit cards and confront challenges when they need to make very large purchases—or even smaller but still seemingly unaffordable ones, such as new clothes or cosmetics. As one frequent buy-now-pay-later consumer explained, paying for $200 worth of work clothes for a new job is much easier when the costs are spread over several weeks, rather than doing so upfront, before her first paycheck has cleared.
In addition to expanding their market to larger numbers of consumers, retailers such as Macy’s note evidence that shoppers who rely on buy-now-pay-later options spend more per shopping trip than if they had to pay cash. This payment method also allows consumers who rely mostly on cash purchases, and lack access to conventional credit cards, to conduct transactions online. In turn, retailers such as Macy’s, Amazon, and Bed Bath and Beyond all have added buy-now-pay-later buttons to their online and mobile checkout pages.
Another key difference is notable in this contemporary version of layaway, compared with historical forms. In the past, each individual retailer offered its own version of a layaway option, meaning that it was responsible to collect the periodic payments and liable for any defaults. But specialized buy-now-pay-later providers are far more common today, such that retailers contract with companies such as Klarna, Afterpay, or Affirm Holdings. These companies accept the risk of delinquent payments, but because they work with a substantial number of retailers, they have access to more information to gauge credit risk. A customer who fails to provide the full payment for a purchase from Walmart thus might find themselves unable to use the buy-now-pay-later option for a different purchase from Amazon—two retailers that both rely on Affirm to maintain their plans.
Noting ongoing financial constraints and challenges for regular customers, both retailers and banking industry actors have indicated their plans to expand and build out additional buy-now-pay-later options. Although many of these plans charge minimal or no interest, such that they earn their revenues by imposing late payment fees instead, some of them feature interest rates that reach as high as 30 percent. Thus the payment plans represent helpful, sometimes necessary routes to purchase, especially for low income consumers, but they also create a potential risk of exploitation of some of vulnerable buyers.
Discussion Questions:
- For which kinds of retailers are buy-now-pay-later plans most appropriate? For which kinds are they less appropriate? How do these categories reflect the retailers’ financial strategies?
- Consider the potential for abuse in this market. What consumer protections should be implemented, as buy-now-pay-later plans expand in number and reach?
Source: AnnaMaria Andriotis, “Amazon Is Doing It. So Is Walmart. Why Retail Loves ‘Buy Now. Pay Later’,” The Wall Street Journal, September 16, 2021