Photo: Walmart
Will layaway programs go away for good (or bad)?
Before credit cards became ubiquitous, layaway was a popular method for letting customers purchase high-price products without having cash on hand. While less utilized than they once were, layaway programs have remained an option at major retailers — though one of the biggest forces in retail is now getting rid of theirs in favor of a different model.
With the 2021 holiday season approaching, Walmart has announced the end of its layaway option, according to Business Insider. The program is being replaced with a buy now, pay later (BNPL) financing service in partnership with provider Affirm. The retailer, which first partnered with Affirm in 2019, was already phasing out layaway last year, allowing it only for some jewelry purchases. The BNPL lets customers bring home purchases immediately and pay for them in installments. Unlike a fee-free layaway program, it can carry an annual percentage rate of 10 percent to 30 percent.
Walmart is part of a shift by major retailers to implement BNPL financing. Retailers and consumer-direct brands, including Best Buy, Macy’s, Nike and Sephora, all offer BNPL options. Apple has been offering a BNPL option in Canada and Amazon.com launched a BNPL checkout option for purchases of more than $50 on its platform.
While layaway — whereby customers do not receive their purchase until they have made all their payments — may look like a dinosaur in a get-it-now world, the model has maintained popularity.
Thirty-three percent of customers as recently as 2018 were planning to use layaway to purchase their holiday gifts, according to PYMNTS. While the model had all but disappeared by the early ’00s, the subsequent financial crises of that decade prompted major retailers to bring it back. Walmart, which had previously killed off its layaway offering in 2006, brought it back in 2011. A distrust of credit cards and their propensity to allow overspending are among the reasons that customers choose layaway.
Some have suggested that the advent of installment plan-based payment methods is an attempt to capture younger, student debt-encumbered customers. Such services are also proliferating in the wake of a 2010 law, which made it more difficult for people under the age of 21 to get a credit card.
Discussion Questions
DISCUSSION QUESTIONS:Â What do you see as the major benefits of buy now, pay later programs for retail operations? Is there still room for layaway programs in retail?
Poll
Loading …BrainTrust
Neil Saunders
Managing Director, GlobalData
Patricia Vekich Waldron
Contributing Editor, RetailWire; Founder and CEO, Vision First
Buy now, pay later programs provide yet another way for retailers to help consumers make a purchase. As noted, layaway and other payment programs are not new, but the way BNPL programs can be deployed today with technology make it extraordinarily convenient especially for younger, digital natives. The growing trend in BNPL also helps address the difficult economic circumstances many younger consumers face. While there is still room for more traditional layaway programs, BNPL is becoming an entirely different proposition, targeted at a different audience.
Moving from layaway to buy now, pay later makes sense for many retailers as it means they can sell goods immediately without having to store them. Some shoppers will also like the immediacy of the service, which allows them to shop later into the holiday season as they don’t need to make payments up front. However buy now pay later isn’t a perfect solution. Some will have to pay interest on the advance which, ultimately, means they will spend more. It could also affect credit scores in a way that layaway didn’t. In general, there is a very casual attitude around buy now pay later but, ultimately, the service is a formal financial loan and can be defaulted on like any other lending. My fear is that there is a bubble here waiting to burst.
I couldn’t agree with you more. The bubble here will burst, at some point.
What was the default rate on layaway programs? I don’t have any data, but I’ll guess close to zero. What is the default rate on BNPL? I’ve seen it go from nothing even being discussed, to it’s an issue, to it’s a growing issue, to … we have a default problem. Sometimes reducing friction at point of purchase simply moves the friction to another part of the whole process.
This is for sure the future of layaway – buy now, pay later. It takes all of the risk off the retailer around whether the consumer pays and if the retailer will get stuck with the inventory (and if it will have to go back out on the floor as a markdown), and gets them paid much faster. Of course they get less than the full price from the BNPL vendor, but I bet it’s still a better deal at the end of the day.
It also enables the consumer to walk away with the item right away, so it’s a win for both sides.
That said, the proliferation of BNPL suggests that a regulatory crackdown may be coming soon – there are already stories of consumers getting in over their heads on BNPL, and if it gets out of control that will be bad for everyone – retailers, consumers, and BNPL providers alike. So I hope the space gets a little less “frothy” soon.
The differences between layaway and BNPL are clear. With layaway there is no fee but the customer does no get the product until the payment is completed. With BNPL, the customer pays a fee but gets the product immediately. The benefits of BNPL to the retailer are that the consumer may opt for it for the immediate gratification factor, the retailer does not have to risk aging the product that may not be purchased in the end, and the retailer does not have to handle the receivable if they contract with a financial service provider.
The merch is out the door and someone else is guaranteeing payment. Afterpay and the like are the future for so many reasons. I don’t know why anyone would take merchandise off their shelf on a promise of the customer returning diligently to make payments. I used to manage these in stores and often your best merchandise was never picked up and past prime selling times. The risk to the retailer is nil – to those guaranteeing payment, still risky.
Much like credit cards, any program that helps consumers pay later for a purchase they can take home today is going to help retailers sell more products. Buy now pay later (BNPL) and layaway are both important tools for retailers to help customers manage their money while still having access to the products they need. Layaway programs can offer longer and more flexible payment terms without impact to credit reports. BNPL allows customers to take the product home while paying, but can affect credit if they default. To the retailer, the challenge of what to do with defaulted products is always going to be an issue, but with layaway the retailer keeps the product until it’s paid for, assuring new condition for resale if it isn’t too seasonal.
Oh my gosh, I just fell out of my chair while trying to balance a cup of coffee as I when I read “Thirty-three percent of customers as recently as 2018 were planning to use layaway.” It was a staple back in my department store years, but with all the options offered by retailers I would have bet that a large percentage of customers wouldn’t understand what it meant. There’s not enough physical space for successful layaway purchases to sit today in stores. Layaway as we know it today is a dinosaur and is disappearing very quickly.
Buy now pay later transactions are continuing to grow as can be seen in Mastercard’s recent announcement to build its own multi-payment post-purchase card process. The buy now pay later transactions offer retailers significant inventory advantages. Instead of the retailer acting as the consumer’s closet and having to restock canceled layaways after peak shopping days and missing markdowns the merchandise is now paid for and in the actual customer’s closet. Certain niche retailers may continue to offer layaways, but I would expect the use of layaways to wane. It is also interesting to note that the layaway transaction has been dropped from the majority of the POS software available.
Layaway programs are well past their expiration date. It was always a compromise for consumers to wait to get the product and for retailers to have to allocate inventory. BNPL addresses a major pain point and provides a financing option that is well integrated into the shopping experience while (in most cases) avoiding some of the issues consumers have with taking on traditional debt. Whether BNPL business models will ultimately succeed to the degree their sky high valuations imply is a very different question. I’d tread carefully.
Layaway is a way of life for some consumers and it is something they depend on to get the gifts and goods they need but cannot afford right now.
While I understand the instant gratification options programs like Afterpay offer, I wonder if they are the be all, end all solution for every consumer. Not everyone will qualify. What happens to those loyal customers who do not? I agree with Neil; there is a bubble waiting to burst here.
With BNPL, there really isn’t room for layaway programs. If you can have the product right away and not have to pay for it all, why would you find an alternative where you don’t get the product until the end appealing? BNPL is an extremely suited solution to our instant gratification retail culture.
Layaway as a concept, in this modern area — to me is dead. It’s complicated and messy from a process and IT perspective now that BNPL is growing in adoption. The shift of responsibility for payment needs to move to a third party in my mind, and the retailer should be getting this inventory off their books, collecting cash and increasing the inventory turn — and AfterPay and the like should be rewarded, in the feeds and APR gained, for taking on the risk of payment. “Layaway is dead, long-live BNPL!”
Retailers no longer really need to maintain layaway programs with the addition of pay in installment services, such as Affirm or Afterpay. This removes the need to store the inventory and manage the payment process themselves, aiding overall store efficiency and operations.
Like all abstractions of money (credit cards, mobile payments, chips at a casino) the further removed the buyer is from hard cash, the more likely they are to spend. Great for retailers who want to capture an impulse buy in the short term, but I agree with other commenters that eventually there could be a backlash depending on how those programs are administered. That said, with all the pressure on stores to stage products for BOPIS and Ship from Store, space is at a premium. Layaway stock just doesn’t move fast enough to justify the square footage.
There will always be a need for layaway for a segment of customers and a line of products.
Anything that makes it easy for consumers to make a purchase is good for the retailer. This is no different.
The questions that need to be answered are, what happens if the algorithms that make instant lending decisions run into macroeconomic conditions unanticipated by the models? And, once the rush for market share is over will the cost to the merchant be increased to the point where subsidizing the purchase becomes onerous?
Unfortunately, our world is impatient and entitled. The main benefit is immediate gratification of a desire or want. We want the latest stuff yesterday and expectations through retail have been to deliver. Layaway doesn’t stand a chance and though it will not completely vanish, there will be far smaller and fewer opportunities until the next financial crisis when lenders and retailers remove default risk. The big advantage for layaway is zero interest.
BNPL will be the dominant installment plan purchasing model after credit/debit cards. Gen Z and millennials will be looking to more BNPL (up to 17% and 21% respectively) based on a Future of Money study from Logica. Still room for layaway during financial downturns and low-credit customers.
The benefit, of course, was the ability to sell to people who couldn’t (currently) pay, but without the risk of offering credit; the downside — equally obvious — was the burden of tracking payments and the possibility the sale ultimately fell thru (how much risk there was of the latter is seldom discussed, though I would think it has happened). As Matt notes, this has largely been outsourced, and it’s not clear to me what advantages are for a retailer to offer it … other than to cater to a (presumably small and eclectic) group of people who won’t — or can’t — use other methods. That latter should serve as a caveat … the mention of “debt unencumbered” seems particularly ominous.
It is good for the retailer in the short run and provides instant gratification to shoppers. However, it creates a high risk credit bubble for consumers that maybe shouldn’t have received the credit in the first place. Time will tell if this causes a widespread problem.