The Supply Side: More retailers offer ‘buy now, pay later’ holiday financing

Buy now, pay later financing is becoming a must-have for Walmart, Amazon, Target and a host of other retailers ahead of the holiday buying season. Walmart was the king of layaway for years and provided consumers the option to purchase holiday gifts or other big-ticket items on time for no added charge.

One caveat was that the consumers had to regularly pay on the layaway items, and the purchase must be completed and picked up at the store by Dec. 15.

Consumers this year don’t have that option. Walmart recently moved to a new financing program offered by Affirm, a finance company that provides installment loans for retail purchases over a set time.

Peggy Knight, vice president of Woodridge Retail in Rogers, spent 22 years at Walmart before exiting the company in 2006 as senior director of financial services. Knight said the move to Affirm is not a replacement for layaway. She said many customers who typically use layaway are non-banked and often deal in cash. Affirm and other buy now, pay later finance programs require a bank account or credit card on file, which is debited monthly for the payments.

“This new program looks like it might be leaving some of the core shoppers at Walmart out of luck this holiday,” Knight said. “I can certainly understand that layaway requires more labor hours, and there is the issue of having to store the items often in containers out behind the store or in the back rooms.

“But there is no way to value all the good publicity Walmart has gotten over the years when celebrities would go into random stores and pay off everyone’s layaway ahead of Christmas.”

The other problem with comparing layaway to Affirm financing is that Walmart did not charge interest for holding the items and letting customers make regular payments. Affirm does charge interest in most cases which is determined by credit score. Walmart said most purchases would incur a charge with an APR rate between 10% and 30% depending on credit rating and the item purchased. Some things are still eligible for a 0% APR rate, but that will typically be a promotional offer affecting certain items only.

It is not the first time Walmart has shelved its holiday layaway program. The company cut layaway in 2006, citing a lack of customer interest.

The company brought it back in 2011 on a limited basis and reinstated the program in 2012 under then-Walmart U.S. CEO Greg Foran.

Walmart recently said that it opted out of layaway this year because of waning use over the past few years. Walmart executives have said they are confident that the retailers’ payment options now are the right solutions for customers today.

Scott Benedict, director of retail studies at Texas A&M University, said he understood the reasoning behind shelving layaway amid labor constraints and the cost of storing items.

“Affirm and other pay-over-time solutions have become far more prevalent in the past few years as consumers have done more shopping online for everything,” Benedict said. “Target has not traditionally offered layaway and is now offering Affirm financing, and that’s a smart move on their part.”

Target recently announced that customers could apply for Affirm financing for purchases over $100. Target also partnered with Sezzle, another payment solution that allows consumers to pay over time with no interest. The Sezzle option, like the Affirm payment plan, does require consumers to apply, and their credit limit varies by credit score and ability to repay.

Consumers who shop through the Sezzle app can place their orders. Sezzle then pays Target for the total purchase. Consumers then set up a repayment plan which is typically four to six weeks depending on the size of the order. Sezzle does not charge interest, but consumers must have a bank account or preloaded Visa or Mastercard debit card by which they pay for the purchase.

“We know our guests want easy and affordable payment options that work within their family’s budget,” said Gemma Kubat, Target’s president of financial and retail services. “Through our partnerships with Affirm and Sezzle, Target is investing in new financial tools that make our shopping experiences more flexible and personalized to guests’ needs, right in time for the holiday season.”

Bed Bath & Beyond, Macy’s and Amazon have also recently begun to offer shoppers buy now, pay later options for select purchases.

Mark Vinter, a senior economist at Wells Fargo Securities, recently said the buy now, pay later finance market was already making a splash before the pandemic and now looks to amplify ahead of the holiday season. He said the most significant players in buy now, pay later financing are Affirm, Klarna, Paypal’s Pay in 4 service and Afterpay, which was recently acquired by mobile-payment platform Square.

Vinter said part of the popularity of the services is because it is cheaper than paying with most credit cards that will charge higher interest rates. He said it’s also an option for consumers who don’t want to go through extensive credit checks and those who may not have high enough credit scores to get traditional cards. He warns that flexibility in payment options is better called “point of sale financing,” saying it could lead some consumers to make purchases they truly cannot afford. Vinter said some governments such as the United Kingdom have begun to regulate the buy now, pay later finance industry.

Vinter said stimulus and monetary support kept many households afloat amid the pandemic, and credit scores on average improved as lockdowns limited spending options.

“Consumers remain in a very good position. Still, the growing popularity of these programs invites some credit risk, especially since they are in high demand among younger generations who tend to already struggle the most with credit card debt going into serious delinquency. Also, while some of these programs do not have interest rates, others can have larger repercussions for missed payments,” Vinter said.

A recent survey by consulting group McKinsey estimated that buy now, pay later platforms have siphoned between $8 billion and $10 billion in annual revenues from banks and credit card companies in the past 18 months. McKinsey also estimates the point-of-sale credit will make up between 13% and 15% of unsecured lending balances by 2023, rising from 7% in 2019. The survey also found that 60% of respondents said they were likely to utilize point of sale programs in the next six months to a year.

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.