Layaway + Credit Card = BNPL
Back in the 1930s – yes, think Dust Bowl and The Grapes of Wrath – storekeepers, hard up for sales but leery of extending credit, invented a facility called layaway.
The merchant would “lay it away” for later pick-up when the consumer had the cash to pay off the balance. (If the consumer did not pay off the layaway in full, she would have to pay fees for restocking, etc.)
In the 1980s, most of mainstreet layaways were replaced by credit cards. Credit cards provided a similar use case to layaways: access to needed credit for consumer purchases. Credit cards of course gave you your purchase immediately but penalized late payment. Layaway, did not charge interest on the unpaid balance.
Layaway, however, never disappeared from the retail landscape picking up during economic downturns. Walmart, for example, discontinued layaways in September 2006 and then kick started them during the 2011 recession to service the credit needs of their consumers.
Layaway was also ideally suited to the new online economy. No behind the counter or warehouse storage concerns – no difficult accounting magic. Products could sit on the skids in the distribution center.
BNPL offers an ideal hybrid between layaway and the Credit Card. It borrowed the best from both models. Let’s look at the three credit facilities when buying a pair of jeans and how BNPL takes from both models:
- You put down a deposit on the jeans
- The jeans are in layaway
- You then make payments over time against the balance due
- Once you’ve paid the full balance, you get the jeans
- Your bank pays for the jeans in full
- You wear the jeans out of the store.
- At the end of the monthly billing cycle you pay the balance due
- If you pay the full balance, you do not pay any interest.
- You put down a deposit against the total of the jeans (from Layaway)
- You wear the jeans out of the store. (from Credit Card)
- You then make 4 equal payments against the balance due (from Layaway)
- If you pay the full balance, you do not pay any interest. (from Credit Card)