Sunday, November 30, 2008

Layaway Plans - Solution to Cultural/Economic Barriers to Consumption

by Karen Coppock

The San Francisco Chronicle wrote about the resurgence of layaway plans in the United States (US) due to the current economic situation and tightening up of credit.

Vital Wave Consulting had recommended using layaway plans to finance technology purchases - mobile handsets and PCs - in emerging markets in its November 2007 report, Strategies to Accelerate Handset Financing in Emerging Markets. The resurgence of layaway plans in the US confirms that this approach is viable even in developed countries when recessionary constraints make the environment similar to that of emerging markets. Most emerging-market citizens have no access to credit, or in the case of the Chinese and those that practice Sharia law, will not or cannot use traditional credit. Layaway plans, however, overcome both the logistical and cultural barriers to credit. Layaway plans generally do not charge interest (hence are compliant with Sharia law) and could be considered a savings plan, which would make them more palatable for the credit-averse Chinese. Layaway plans do not require a credit history, fixed income or mailing address, all of which are generally required for a credit card.

The challenge with technology-oriented layaway plans is the dynamic nature of the industry - products can change significantly in the weeks or months micro-payments are being made toward a purchase. To address this problem, retail outlets could create a layaway plan to enables consumers to save toward a specific product and if a newer, similarly priced version comes out in the interim, the funds could be transferred toward payment for the newer product.

Layaway plans were the backbone of the retail industry in the US after the Depression and can be a global strategy for firms dealing with increasingly tight credit markets and budgets.

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