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Retail Insights


Struggling to keep up with the latest and greatest in payment innovation? Here’s the good news: if you’re familiar with the concept of layaway, you’re already well-versed in the basics of buy now, pay later.

First, a 30-second history lesson: layaway programs originated in the 1930s during the Great Depression, when merchants needed a way to attract limited-income shoppers without any risk. They remained popular for decades, until credit cards became a more common alternative. 

In recent years, however, credit cards have lost their luster. Almost half (47%) of American adults carry some amount of credit card debt, a number that’s increased 4% during the COVID-19 pandemic alone. They need a better option, and forward-thinking merchants have responded to the call, with a modern take on the traditional layaway program that minimizes risk, boosts sales, and increases customer loyalty.

How Do Traditional Layaway Programs Work?

Layaway programs have worked the same way for decades, enabling merchants to sell high-priced items to customers with limited disposable income or poor credit. Instead of paying a lump sum for an item upfront, the customer pays an initial deposit. The merchant then “lays it away” and stores it until the customer can pay off the balance. 

Customers will pay weekly or monthly installments to the merchant, either by visiting the store in-person, or via automated deductions from a checking account.  Merchants may also charge a layaway fee to cover the costs of storing the item. Once the customer has fully paid off their balance, they can pick up the item and take it home.

The greatest risk a merchant faces with a traditional layaway program is the cost of storing an item and the possibility that the customer will not be able to complete their payments. If that happens, the merchant can choose not to return any of the customer’s money or charge a cancellation fee. Even if the merchant issues a full refund, they still haven’t lost the merchandise.

For many merchants, the benefits of layaway outweigh the risks. Without a layaway option, many customers would have no ability to purchase expensive items. They simply don’t have enough disposable income to purchase something upfront. And, by the time they save up money, the product may no longer be available.

So, what happened to layaway? In a word (or two): credit cards. With the exception of a slight rebound during the Great Recession, layaway fell victim to the rise of credit cards in the 1980s. Credit cards allow shoppers with little disposable income to receive an item instantly and gradually pay off the balance later, whereas with layaway they would have had to pay in full to receive the item. Credit cards also eliminate the inherent risks of layaway for merchants, since they receive the money upfront and can move their merchandise off the shelves.

The Problem with Credit Cards

There’s only one problem. Not everyone is eligible for — or even wants to have — a credit card. When merchants shut down their layaway programs and pivoted to credit cards, they inadvertently closed themselves off to a significant portion of consumers. 

How many, exactly? Nearly one-third of shoppers, according to some estimates. That’s how many Americans don’t have a credit card. Further, millennials and Gen Z shoppers, who make up a growing percentage of consumers, simply have less interest in getting a credit card than prior generations did. 

Collectively, the millennial generation carries over $1 trillion in debt, due to student loans and the unfortunate timing of experiencing two recessions during their early years in the workforce. As a result, they’re more wary of credit card debt and are less likely to use them than baby boomers and Gen Xers are.

Instead, many younger consumers are turning to buy now, pay later (BNPL). Between April and September 2020, installs of BNPL apps doubled. More than one-third of U.S. consumers have used BNPL, including 40% of millennials and 57% of Gen Xers.

What is Buy Now, Pay Later?

Buy now, pay later offers a consumer-friendly alternative to both traditional layaway programs and high-interest credit cards. With Zip, customers can opt to split their payments into 4 installments over 6 weeks, wherever they shop (online or in-store). 

The merchant receives payment for the purchase immediately, and Zip absorbs all fraud and payment liability. The retailer then processes and ships the order like they would for any other transaction. 

BNPL essentially solves the problem posed by traditional layaway programs, as both parties get what they want upfront. The customer receives their purchase, and as long as they complete their payments on time, they won’t pay any hidden fees. Meanwhile, the merchant receives full payment upfront, without having to assume any of the risk of a customer defaulting on payments. Zip can also be integrated seamlessly with a retailer’s current order processing and return flows.

5 Benefits of BNPL: A Better “Pay Later” Experience

Buy now, pay later offers several key benefits to merchants, and is becoming an increasingly popular payment option among consumers. Let’s take a closer look at how BNPL improves upon the “pay later” experience of traditional layaway. 

  1. Merchants receive payment upfront.

With BNPL, the merchant collects the entire payment upfront. The BNPL service processes an initial payment from the shopper and assumes the risk that they’ll make their subsequent payments. This is a significant advantage of BNPL over traditional layaway, where merchants only received a down payment. With BNPL, merchants get paid immediately, with none of the risk. 

  1. The BNPL provider, not the merchant, manages the installment plan.

With traditional layaway programs, merchants were responsible for establishing and maintaining payment policies. Would they require customers to pay on a weekly or monthly basis? How would they collect and record payments? 

With BNPL, the payment provider handles all of that. Different BNPL services offer different plans, and shoppers can choose a payment plan that works for them — especially if a merchant supports multiple BNPL providers. All the merchant has to do is select the BNPL provider and integrate it with their POS; the provider manages payments from there.

  1. Merchants can fulfill orders quickly.

One major reason customers love BNPL is that they receive their merchandise just as quickly as they would if they had paid for it in full. This is also a benefit for merchants. They no longer need to allocate dedicated storage or inventory management resources to reserving layaway items; they fulfill and ship those orders just like everything else. 

  1. BNPL offers payment flexibility at a range of price points.

Because of the risk and management costs of traditional layaway, merchants traditionally reserved the option only for big-ticket items like furniture, jewelry, and electronics. 

With BNPL, merchants can still decide to do that—or, they can open it up to a wider swath of their inventory for purchases as low as $35. On average, Zip merchants see a 60% increase in AOV after implementing BNPL. 

  1. What’s good for consumers is good for merchants. 

Customers say they’re 40% more likely to complete their purchase if BNPL is offered at checkout. When customers love something, merchants reap the rewards: at Zip, we’ve seen that implementing BNPL increases the repeat customer rate for our merchants by as much as 80%. Our merchants also enjoy significant increases in conversion and topline sales.

Is It Time to Modernize Your Layaway Program?

BNPL takes all that was good about traditional layaway, and elevates it to the next level. 

There’s one more benefit of BNPL services we didn’t mention: they’re quick and easy to implement. You can integrate Zip with your ecommerce platform in just ten minutes, no API required. Learn more here.


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