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The New Layaway
Just a few decades ago, it wasn't uncommon to put Christmas gifts on layaway. You’re probably familiar with the idea: A shopper would reserve an item at a store — say, a shiny new bike — make payments and receive the item once the balance was paid in full. There was no risk to the merchant, and little for the customer: If the customer didn’t pay in full, the merchandise was returned to the floor, and the customer received their money back, often less a fee.
Use of layaway declined as credit cards grew more popular; Walmart retired its program in 2006. The big retailer then revived layaway in 2011, only to discontinue it again ahead of the 2021 holiday season, replacing layaway with buy now, pay later (BNPL) through its partner of two years, Affirm Holdings.
BNPL has grown increasingly popular with consumers, with 41% of Americans using these services in the past year, according to an October survey from consumer research firm Pipslay. The loans tend to be small and short term — they’re typically paid off in four installments or less — so credit risk is low for these providers, says Alex Johnson, director of fintech research at Cornerstone Advisors.
“[BNPL providers] actually try to steer your behavior and encourage you to shop from the moment you open the app,” Johnson says. A quick glance at Klarna’s website, for example, reveals deals from brands such as Bose and Tommy Hilfiger, and promotes merchants including Etsy, Macy’s and Bed Bath & Beyond. A browser extension launched by the company on Dec. 9 allows consumers to use Klarna at any online retailer — not just its partners. This makes it easier for consumers to spend: An April poll by LendingTree found that two-thirds of BNPL users spent more than they would have without those lending products.
That’s got regulators concerned. On Dec. 16, the Consumer Financial Protection Bureau announced it's looking into BNPL programs, citing concerns about “accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology.” Holiday shopping on Black Friday and Cyber Monday had even more Americans using BNPL, according to the CFPB.
“Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too,” said CFPB Director Rohit Chopra in a release announcing the agency’s inquiry into the practices of BNPL providers Affirm, Afterpay Ltd., Klarna Bank AB, PayPal Holdings and Zip Co. Ltd.
The CFPB’s inquiry appears unlikely to significantly transform the BNPL industry, according to a Dec. 17 Piper Sandler & Co. note on Affirm. “The BNPL industry was bound to receive regulatory scrutiny from the CFPB due to the adoption of the product by more credit-sensitive borrowers and a much more active CFPB under the Biden administration,” wrote Managing Director Kevin Barker. “At this point, we would not expect these inquiries to lead to transformational changes to the industry.”
Put another way: It’s too late to put the genie back in the bottle.
• Emily McCormick, vice president of research for Bank Director
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