By Lesley Gaudio, Global Financial Services Industry Marketing Senior Manager, Protiviti
First there were layaways. Conjured during the Great Depression when people were struggling to make ends meet, layaways allowed people to buy big-ticket items and pay in installments before walking away with their product. Layaways were especially popular around the holidays when many people reserved all their gifts in advance and started saving for them through a layaway program. Then came the retail and private-label installment plans that let you take that large-screen TV or the fully adjustable mattress home and pay it off over time – interest free if you made the payments on schedule. Now it’s Buy Now, Pay Later (BNPL), which has brought that same no-interest, post-purchase monthly installment concept to all categories of products, small and large, and even services, fueled by an easy, convenient and digitally enabled payments and credit value proposition provided primarily by fintech companies.
The business model behind these installment plans has changed slightly over the decades though some elements have remained the same. Layaways were the sole responsibility of merchants, who bore the administrative costs of collecting the upfront payments but did not take any credit risk because the sale was completed once full payment was made. With post-sale installment plans, a bank or a specialty lender was typically involved, taking the credit risk and getting some compensation from the merchant for that risk. Yet most of the bank’s income came from the finance charges paid by customers who did not pay off the installments on time. The BNPL provider also makes money from interest charges due to late or missed payments as well as receiving a fee from the merchant for taking on the credit risk. But unlike the banks and specialty lenders involved with private-label and retail credit installment plans, the BNPL fintech companies have “softer” credit standards and could face large losses in the case of customer defaults.
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