A Cool New Image for Old-Fashioned Debt

A Cool New Image for Old-Fashioned Debt

Will cutting-edge layaway plans be the salvation of the retail sector and the broader economy, or are they a disaster waiting to happen? The newest experiments in making it consumer payments easy is creative, but may not bring the long-term results that retailers hope to see.

Sure, they are being done through a cutting-edge Swedish payment system and all, but are the new ‘buy now, pay later’ plans being introduced by H & M and Abercrombie (NYSE:ANF) really any different than old-timey lay-away plans? The retailers, anxious to lure in cash-strapped Millennial buyers, are introducing the their new alternative pay options as a way to make it easier for them to pile their carts with cutting-edge linen jumpsuits and must-have camis, the likes of which can run into eye-popping amounts of money. But no worries, take your time and pay when you can! It is an old idea, and one that raises several questions about the economy and the retail sector.

It is not actually a secret that both retailers and Millennials are in a kind of dark place. For Abercrombie and the like, the competitive space is a brutal one. Quarter after quarter brings reports of lower-than desired revenue and piles of unsold inventory (a result of tight budgets, and competition from everything from electronics to thrift shops) and a tight margins. Millennials, as well as teenage Gen Zs, have less money than they would like to spend and increasingly seem disenchanted with the mall. It is not a good situation if you want to move those jumpsuits.

And so we have companies like Klarna, the Swedish company teaming up with Abercrombie. The company is basically a payment provider and bank that lets shoppers (in this case online shoppers) the option of paying for their purchases over a set period of time. The system is already in place in Germany, and will be introduced in the U.S. and the U.K. later in 2019. The result, hopes the retailers, is more shoppers popping items into their online shopping bags and then proceeding to the checkout. After all, a $200 splurge seems less splurge-like when it is really only $50 a month for four months.  It is an old system, one that used to be used by department stores decades ago, and has more recently been taken up by stores such as Walmart and Toys R Us.

Of course, whether or not plans like these end up being good for retailers, there are plenty of reasons to be wary of what they might mean for the overall economy. Taking on debt and paying interest or fees (which ultimately is what happens if payments are late, and in some plans are part of the financing anyway) makes sense if you are buying an asset like a house that is likely to hold its value or appreciate over time. The problem with the jumpsuit is that by the time it is paid off, it may well be a rag shoved at the back of the closet and at any rate has little to no resale value.

Encouraging consumer debt for fast-fashion type clothing does not seem like a great idea for the health of the broader economy, to say the least. Any time when credit is too cheap and easy, people tend to take on too much of it and the results are not always pretty. If and when that happens this time, the end result is not going to be good for anyone including retatilers.

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