Is POS Financing the Same as Online Layaway?

State of Payments | 5 mins

The ecommerce payment ecosystem is filled with terms that sound similar, but deliver vastly different outcomes. Two that spark merchants’ attention are point-of-sale financing and online layaway.

To fully explain the evolution of online layaway, and how components of this purchasing method evolved into the modern point-of-sale financing system available today, historical context is needed. We take a look back to the era of the Great Depression, when the concept of layaway was born. This narrative will show why merchants should look beyond online layaway options and embrace a more flexible POS financing solution that fits the needs of today’s modern online shoppers.

The Evolution of Online Layaway

Dating back to the 1930s, layaway became a popular practice for about 50 years until credit cards took over in popularity. If you study economic changes and consumer habits across those five decades you’ll have an inkling as to why online layaway was a hot trend. Consumers were eager to buy big-ticket items, but they didn’t have the credit options or desire to do so in one lump sum. The narrative changed a little each decade, but the core reasons why consumers gravitate toward the concept of alternative financing options remain the same.

Consumer demand created a market where it was normal to reserve an item that they could receive once it was fully paid for. The agreement between the merchant and the shopper was pretty low risk for the seller, which made the practice popular for merchants. As credit cards became more ubiquitous to the everyday consumer in the 1980s, traditional layaway options faded as shoppers turned to alternative ways to pay for items to get instant gratification.

By the early 1990s, the concept of ecommerce started to take off, setting the stage for online layaway programs. It took time for ecommerce to stick, but the early 2000s became a popular time for big-box merchants to launch online layaway programs. Today, merchants that offer in-store and online layaway today include major companies like Big Lots, Kmart, Marshalls, T.J. Maxx, Sears, and Walmart.

Merchants who offer these programs are looking for any way to attract more shoppers to their sites as they are already struggling to keep their turf in an Amazon-run retail market. They are relying on online layaway options to appeal to consumers who might not have good enough credit to rely on traditional financing since a credit check isn’t needed. These consumers still want financing options, but they often don’t want to take on more credit card debt. The concept is simple: If the shopper defaults on the agreement, they don’t get the item. This option also has drawbacks as it doesn’t allow consumers to achieve their other goals: pay for and receive items faster, more smoothly, and without added purchasing friction.

How POS Financing Innovated the Online Layaway Market

Online layaway deals, which typically allow for items to be paid off in 8-12 weeks, still come with additional fees and interest, and the terms aren’t always transparent to consumers. Shoppers only have 2-3 months to pay off the item, or they risk losing it altogether. Online layaway also creates a delay in the purchasing experience, since the shopper can’t have access to the item until it is fully paid off. This hinders a merchant’s ability to keep the shopper coming back to their site to purchase additional items.

At its core, POS financing allows buyers to apply for a loan or line of credit that finances a specific purchase or allows the customer to purchase up to a set limit with a single merchant and pay it off over time. POS financing can typically have payment periods that stretch over 6 to 12 months, and often as much as 36 months. With solutions like Bread, there are none of the cancellation or early repayment penalties that one may find with online layaway deals.

The benefits for merchants are clear. Online, point-of-sale financing can be integrated directly into the merchant’s website checkout experience. Unlike online layaway, POS financing has the opportunity to engage a customer in the buying experience even before they get to the checkout page. The customer is able to apply and get quick approval for financing at any point in the online shopping journey. Payment terms are clearly laid out, and the shopper is able to get the item upon ordering.

Merchants that offer point-of-sale financing in their online stores have seen up to a 33% lift in average-order-value and a 9% increase in sales, all without taking on any additional credit risk. Unlike online layaway options, merchants get paid up-front for a purchase. For merchants using a buy now, pay later platform, they alleviate much of the credit and fraud risk—making it simpler to integrate into their overall ecommerce experience. Point-of-sale financing also makes it possible to offer financing options to consumers outside the traditional financing fold.

A POS financing system like Bread offers a white-labeled, personalized pay-over-time solution that helps merchants offer more flexible payment options that are designed to support consumers who want to finance an item over a longer period of time and on terms that work better for them. Unlike the old-school online layaway that only has terms that benefit the merchant—making it less likely the shopper will take on the risk to actually make the layaway agreement—POS financing is a more innovative payment option that empowers consumer choice.

When considering if an online layaway program or a POS financing solution is the right path, it’s worth taking into account what consumers want out of their shopping experience. At the forefront of those desires are simple, secure ways to buy products online that allow them to get an item quickly and without any friction. Only one financing solution checks that box. The online layaway market might have worked for the ‘90s and 2000 crowd, but in 2020, consumers expect simple, fast and flexible online shopping payment options and experiences.