Layaway’s Visible Resurrection

Layaway — the system where a merchant holds an item aside for a consumer, usually for a small fee and a deposit, until the consumer finishes making installment payments on the item — was an invention of the 1930s, created by retailers to ensure that even during a massive economic downturn, consumers could still find a way to shop.

The concept was a massive hit, and for nearly 50 years it was a shopping way of life for American consumers. That started to change, however, in the 1980s, when consumer use of credit cards became widespread.

“Once everybody got a card, there was no reason for layaway,” Howard Davidowitz, chairman of retail consulting firm Davidowitz & Associates told Bloomberg.

Cards offered the same ability to pay over time, but came with the instant-gratification factor of buying first and paying later — an appeal with which layaway couldn’t compete. The practice continued to die out throughout the late 1980s and '90s until by the early 2000s it was nearly dead.  Walmart officially pulled the plug on layaway in 2006, and as of 2008 only a handful of retailers — Kmart, Sears, TJX stores and Burlington Coat Factory — were offering it at all.

But 2008 marked the start of the Great Recession, and layaway suddenly started looked a lot less dated to some shoppers. Kmart had a better than expected holiday run that year (while almost everyone else in retail reported the opposite condition), and attributed that to its 600,000 layaway customers. By 2009 more retailers were getting back into the layaway game, driven by consumer interest — and even Walmart decided to flip the light back on layaway in 2011.

And while the resurgence of layaway was earlier connected with an economic recession, it should be noted that this year, in 2018, 33 percent of consumers plan to use layaway to buy their gifts, according to NerdWallet. That not quite the level of action credit cards are going to see — 78 percent of consumers plan to put some or all of their holiday spending on a card — but it does indicate that for a fairly notable pocket of consumers interest in layaway is both healthy and not aligned with the overall state of the economy.

So who are these customers — and why the layaway love?

The Changing Profile Of Consumes Who Eschew Credit

Layaway users are often stereotyped as lower-income consumers who lack access to things like credit cards. That stereotype is not entirely wrong, Terry Rolecek, head of Shop Your Way Financial Services at Sears Holdings Corporation, told MarketWatch last year — but it isn't really complete. Income isn’t really the most unifying factor: plenty of middle-class consumers who could access other credit mechanisms also use layaway. The common element, Rolecek noted, is how forward-looking the customer is.

“Layaway is more of a planning customer, more of a budget-conscious customer who knows they can spend $25 a week on Christmas,” Rolecek explained.

She also noted that parents tend to like the service, because it gives them a place to keep their gifts during the run-up to the holiday season. “If you’re in a smaller home or apartment and there’s not a place to hide your presents. It’s, ‘I can come pick it up later and the kids won’t be snooping around the closet.’”

The bigger issue, and the growing appeal of layaway, according to Kimberly Palmer, a financial advisor at NerdWallet, is that layaway helps consumers escape the biggest risk that comes with the instant gratification of credit card use — overspending. As of holiday 2018, she noted, 25 percent of customer report they are still paying off last year’s debts.

“It's so easy to overspend with all of the excitement and ... people forget that they will have to pay all of that debt off eventually,” Palmer said. For an emerging class of customers, paying that debt off now is simply a more attractive option than running the risk of facing a year of interest payments due to over-exuberance.

And, a quick glance at the latest edition of PYMNTS Financial Invisibles Report tells you who those consumers might be — as well as why layaway might be looking more appealing to consumers.

The report breaks consumers into four categories. “No Worries” are consumers who are generally most affluent and educated, most likely to pay their bills on time and most likely to successfully use a large number of mainstream financial services. “Second Chances” are consumers who have had difficulties in the past, but have generally through income improvement found themselves more likely to access mainstream financial services — although they statistically continue to have difficulty paying bills on time. “ShutOuts” in the lowest income bracket tend to be unable to access mainstream financial products like credit cards and have the most difficulty paying bills on time.

The most relevant group for this discussion, however, is the “On The Edge” persona. While this group has some difficulties — paying bills on time most notably — this is also the group that doesn’t use products like credit cards, not because they can’t, but because they choose not to.

And in fact, many of the consumers in this profile are, by most counts, solid financial citizens. Most have college degrees and report low debt. A minority (43 percent) report living paycheck to paycheck and a majority (57 percent) save money.

Only 40 percent in this group report having a credit card, while 18 percent report having a store-branded card.

And if they can’t pay upfront, this is the group of consumers most likely to either wait until they can, or experiment with layaway.

What Will They Buy?

It is hard to say what consumers will purchase during the 2018 shopping season, with the season having only “officially” begun today.

Last year, according to retail sources, the most popular layaway items were high-priced electronics, with large-screen TVs dominating the buying.  Jewelry is also a perennial favorite, with diamond engagement rings leading the sparkly pack.

As for the more quirky purchases, trampolines and scooters were big last year, though it is impossible to know if bouncing and rolling will be as popular this year.

But whatever the items, it seems a third of consumers will be putting them on layaway, and paying them off slowly throughout the holiday season — not necessarily because they have to, but because they prefer to.



About: Accelerating The Real-Time Payments Demand Curve:What Banks Need To Know About What Consumers Want And Need, PYMNTS  examines consumers’ understanding of real-time payments and the methods they use for different types of payments. The report explores consumers’ interest in real-time payments and their willingness to switch to financial institutions that offer such capabilities.