Buy Now, Pay Later Is an Innovation That’s 200 Years Old
(Bloomberg Opinion) -- Everything old is new again. Witness fintech giant Square’s recent acquisition of Afterpay, a company that enables consumers to buy now and pay later via regular payments administered by the Australia-based company.
Afterpay appeals to young millennials eager to move beyond conventional forms of financing such as credit cards. This may seem cutting edge to the youngsters, but it’s nothing but a reboot of a credit system their great-great grandparents knew and loved: the installment plan.
Imagine, for a moment, a world without credit cards and other familiar forms of consumer financing. If someone two centuries ago wanted to purchase a big-ticket item such as a plow or cart, they had to front the full purchase price or borrow from family and friends.
That started to change in the early 19th century. According to historian Lendol Calder, the first forms of installment credit appeared in the U.S. at that time when a furniture dealer in New York City began selling goods this way.
The first installment plans, like most that followed, rested on a legal foundation that structured them as a formal contract. When a buyer failed to make a payment, the seller could repossess the goods. Eventually, courts also permitted sellers to retain whatever payments had been made.
But installment plans remained unusual until the middle of the 19th century, when a growing number of essential — and expensive — consumer goods came into the market. These included mechanical reapers like the ones invented and marketed by Cyrus McCormick. Even the cheapest such machine was well beyond the price range of the average farmer. But their appeal was obvious: they cut harvesting time by 95%.
It was the sewing machine that turned the installment plan into a popular form of credit. In the 1850s, a number of companies began marketing sewing machines to consumers, especially housewives.
These time-saving inventions cost well over $5,000 in today’s dollars, far beyond the means of the middle-class families that wanted them. Unlike a reaper, which might pay for itself in one season, sewing machines required many more payments stretched out over months or years.
The genius behind the new credit system was the Singer Company’s Edward Clark, who first asked in 1856, “Why not rent a sewing machine to the housewife and apply the rental fee to the cost of the machine?” He apparently took inspiration from piano manufactures in New York City, who had introduced a similar concept at the time.
Singer’s credit system transformed the company’s fortunes. Within a year, sales tripled, and within a decade, Singer had blown past all competitors, largely because it had devised a new method of financing that eventually demanded a mere dollar a week from prospective buyers.
By the end of the century, specialized retailers -- so-called “installment houses” -- had become ubiquitous in the nation’s cities. They offered a wide range of household goods on credit: furniture, bedding, dishes, even clothing. Many conventional retailers responded by offering their own installment plans.
By the early 20th century, installment plans had become so ubiquitous that a researcher at Columbia University marveled, “One may buy a house and furnish it from top to bottom with every article of necessity, convenience, and luxury he desires; he may clothe himself and his family; he may deck himself with jewelry and all sort of articles of adornment; he may go abroad, and having seen Paris, he may die and be buried — all on the instalment plan.”
At first, installment plans were associated with working-class consumers, many of them immigrants, who needed the flexibility that installment plans provided. This, combined with the fact that some crooked retailers abused the installment system to pawn off shoddy goods on unsuspecting consumers, gave the practice a bad name.
And then things changed. The key development was the rise of the ultimate durable consumer good: the automobile. Few people could purchase this big-ticket item in one payment. Banks didn’t want to lend money for them. In response, a handful of entrepreneurs formed the first “sales finance” companies in the early 1910s. These enabled auto dealers to extend installment credit to would-be buyers.
Henry Ford’s son, Edsel, tried to persuade his father to form their own subsidiary to provide this kind of financing to buyers. Ford refused, thinking that buyers should be forced to pay cash.
Executives at Ford’s chief competitor, General Motors, proved wiser. In 1919 they formed the General Motors Acceptance Corporation, which brought installment credit into the mainstream. It revolutionized auto sales, sparking a massive increase in consumption and enabling General Motors to outsell Ford by decade’s end.
In the process, installment credit became respectable. By 1930, it financed most cars, radios, furniture, washing machines, vacuum cleaners and phonographs purchased in the U. S.
This growth continued into the 1930s, despite the Great Depression. Though some commentators blamed installment credit for leading the nation to economic ruin, the reality was otherwise, and this system of middle-class finance remained firmly entrenched.
The advent of postwar systems of credit — namely, the credit card — led to a decline in installment purchases, particularly for smaller items.
If Square and Afterpay successfully revive installment buying on a mass scale, it will be further proof that the best ideas don’t have to be new.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stephen Mihm, a professor of history at the University of Georgia, is a contributor to Bloomberg Opinion.
©2021 Bloomberg L.P.