Folk economics: pay as you go

I’m old enough to remember when putting a large purchase on layaway was a common thing to do. Things changed, of course, and since then when I wandered in the back parts of an older KMart or Sears or JCPenny in search of a bathroom and stumbled upon the layaway counter, I thought “How quaint!” and wondered if anyone still actually brought in an item to be stored while they came in to make regular payments on it.

Well, layaway seems to be back. I’ve seen this noted by a number of people, but here’s a mention by one of my favorite economic thinkers, Harvard professor Elizabeth Warren.

K-Mart has a new ad: Pick out your Christmas presents today, pay a little now and a little as you go along, then pick up your paid-for presents in time for holiday giving. […]

Could this ad be an early sign of how purchasing will change in America? A Pay-Now, Buy-Later plan will undoubtedly constrict spending in the short term, but in the long-term it would mean that the money that now goes to interest, fees and interchange fees (about $107 billion in 2007) can be used to buy socks, haircuts, prescription drugs and a million other goods and services.

This is a good example about why I like Elizabeth Warren so much. Not only does she point out the obvious part, namely interest and fees on credit cards, but she catches the less obvious one, interchange fees. What are those?

Retailers pay about $23 billion in interchange fees so that their customers can use credit cards.

It doesn’t always occur to consumers that using a credit card costs the merchant around 3% of the transaction cost. And credit card companies explicitly prohibit merchants from passing that cost along to the customer in the form of a surcharge for using a card. So instead merchants hide the cost elsewhere, usually in a higher product price. Which means that not only do card users come to see card usage as being free, i.e. same as cash, but cash customers end up paying an unnecessary additional 3% even though they aren’t using a card.

This situation developed in such a way that few people ever counted the cost. At this point we depend so heavily on cards that we might think that 3% is a fair price for the convenience, but if we had been presented with this cost up front (or if it had been made visible through a surcharge) would we have been so willing to accept it? Would it be worth the trouble to you to bring cash or write a check if it meant saving $6 on a $200 grocery bill?

Today’s retailers say they have no choice: so long as their competitors take credit cards, they must do the same or see their customers migrate elsewhere. But if credit availability contracts across the board for consumer, the long-term fallout for K-Mart and thousands of other retailers may not be all bad.

A similar situation evolved with merchant hours. I’m old enough to remember when stores were open at most forty hours a week, sometimes even less, and those hours coincided with the rest of the world’s working hours. But once someone got the bright idea of getting a leg up on their competitors by staying open longer, those who began losing customers to that bright fellow felt the pressure to match his hours. The result was not that customers bought more or that more total customers enter the marketplace, but that a given amount of business was stretched over additional hours, requiring more hours worked and more utilities utilized, adding expenses to the seller that were passed back in the form of higher prices. We all pay for the convenience of that one fellow who wants to be able to walk into a Wal-Mart at 3am and buy anything they sell.

(And don’t get me started on how much more your produce costs you at a supermarket for the sake of customers who expect to walk into the store at 8:30pm and find abundant quantities of any vegetable might take a mind to buy.)

In the early 80s I took a trip to the Netherlands. I watched Princess Diana get married on Dutch television. I drank some excellent beer and ate good, fresh food. And I quickly learned to be very conscious of store hours, which by law were not only limited to forty hours per week, but the same forty hours for everyone, 9am to 5pm Monday through Friday. There were some exceptions—bakeries could shift their hours earlier in the day, and restaurants and bars were exempt. But otherwise shopping was very inconvenient—by American standards, anyway.

Not long before I arrived there had been a major innovation, namely Thursday evening shopping, with stores remaining open until 8pm. But this required that the hours be reduced somewhere else, so stores now opened at noon on Monday. Americans can hardly imagine such encroachments on their convenience. But I thought it was quite humane and still do, both for the customer and for the merchant. Is it really so difficult to plan our lives to get our shopping done within such limits? Is the minor convenience that 24/7 brings worth the cost in terms of higher prices and the need for third-shift jobs?


14 thoughts on “Folk economics: pay as you go

  1. It’s not too much for me! (Though I have to admit to a couple of very late night runs to pick up some things on the way home from the hospital discharge on a few occasions last year!)… However, I have friends and family whose entertainment is shopping…they would go berserk!…at least at first!

  2. You forget, that the point of the store being open is so that people can wander in anytime, and leave with a LOT more than they had planned on purchasing. If you force everyone to shop during limited hours, they will have to plan more. If they plan more, they will use a list. If they use a list (and stick to it) they will buy a whole lot less of your stuff. Being open late hours encourages impulse buying, and that seems to be the holy grail of retail. Of course, this only applies if you want to ENCOURAGE the consumer culture. I’m guessing northern Europe has less of a consumer culture than we do. Thanks Madison Avenue, we really appreciate it.

  3. Realizing I’m under no obligation to confess anything here, I will say, anyway, “Ouch.”

    My husband and I never carry over credit card debt from month to month, but we do extensively use the one that gives cash back precisely for the reason that we are able to earn the cash-back bonus every month. And while I did know what those interchange fees were, I didn’t connect the dots the way you did, Rick.

    I make lists and stick to them, and I don’t wander around stores looking for things to buy, but apparently I can do better.

  4. Forgot to mention:

    I was in a sporting goods store a few months ago picking up an item that had to be ordered in and while standing at the customer service counter, a gentleman walked over with his son and said to the clerk, “I want to put some money towards my layaway account.” (He had a gun–a rifle, I think, on layaway.) I didn’t know any stores even offered layaway anymore. I was shocked.

    I remember my mother using layaway for clothing for my siblings and me, and I distinctly remember her taking advantage of the Christmas Club program offered at her place of employment. She’d start saving months in advance for Christmas. I know of places that offer that service yet, but I wonder how many people use it…

  5. Sarah,

    And while I did know what those interchange fees were, I didn’t connect the dots the way you did, Rick.

    There’s no shame in that. The system evolved as it did, and there’s really no way out, so you might as well take the benefits where you find them.


    Three percent is criminally outrageous. Count me in the population who had no idea.

    After a little research (i.e. looking at this Wikipedia entry on interchange fees) I find that the national average is actually two percent. But I think that must be because very large firms are able to squeeze significant discounts from the credit card companies. When we first began taking credit cards, we dealt directly with the companies and paid at least 3%. Now we use Google Checkout, which charges us 2% plus twenty cents, which is 3% on a $20 purchase; I figure the lower cost comes because Google is trying to knock off PayPal, which charges 3% and more. Sam’s Club at first took no credit cards, then began taking Discover, and just recently began taking MasterCard (but not Visa), I assume because they drove a hard bargain with those companies.

    Many smaller businesses (including us) get around the surcharge prohibition by offering a discount to cash customers, usually 3%. And whether or not a discount is offered, I wouldn’t hesitate to ask a merchant for a cash discount on a significant purchase; they are painfully aware how much a credit charge costs them. Or, if you’re in the mood to be nice, be aware that paying cash will save them money, whether or not they pass on some of the savings to you.

  6. I’ve been surprised to learn that late hours is not necessarily a new thing. I’m not trying at all to disprove what you’ve said other than a little bit of contrary evidence which may or may not have been more prevalent. I’ve read newspapers from the 1870s or 1890s (I don’t remember which decade had this info), but at one point the merchants in town made an agreement NOT to be open past a certain time because they had been staying open to an amazingly late hour. My dad told about going into town on Saturday night when the stores were all open. I was suprised. Just as surprised to read stories about babies abandoned by the side of the road and a baby found drowned (purposefully) in a pond.

  7. Patti,

    At one point the merchants in town made an agreement NOT to be open past a certain time because they had been staying open to an amazingly late hour.

    I think your example points to the source of the problem, namely that what is advantageous to the individual can often be detrimental to the group. One storekeeper stays open later and begins to draw off customers from the pool that shopped during normal hours. Other storekeepers have to match those hours in order to draw those customers back. The result is that all storekeepers have to stay open longer just to keep the business they already had.

    A similar thing happens in churches. One church invests time and money to stage programs that attract folks from other churches, and it grows. The other churches must also invest time and money to stage similar programs or else shrink. Net result is no new parishioners, but much more time and money expended.

    What is surprising about your example, at least in this day and age, is that the merchants saw the problem and fixed it by agreeing to rein in their individual greed for the sake of the group. These days we would probably expect such an action to be illegal, or at least grumble that such “interference in the free market” was denying us as customers the added convenience that we are entitled to and that unbridled competition would produce for us.

  8. All the shops in our town used to stay open late on Saturday night. That’s the day the farmers from all around came in to sell their stuff and do the shopping they couldn’t do during the week.

    Until recently, we didn’t have any stores open past 10:00 Pm (and only one store was open that late. Even our fast food places closed that early).
    No grocery stores opened before 8:00 AM.
    And we have a Walmart (just not a superWalmart).

    Then about a year ago, one of our three grocery stores started staying open until midnight and opening up at 6:00 AM. The other two won’t be following suit. The way that store manages those hours is by requiring only their salaried workers to put in the longer hours- so the managers are working more, but their pay didn’t increase- so the costs to the store owners did not increase much either- for the most part even the utilities are about the same since stockers were staying that late to finish cleaning up and putting new stock out.

    I have been a midnight shopper- I liked the empty store, the quietness, and shopping after my children were in bed. But I had to adjust to how things are here when we moved here (and my kids are much older now, so the reason for midnight shopping is gone), and it wasn’t that hard.

  9. I should have explained that when I say the stores used to stay open late Saturday- that’s what my mothers remembers from the forties and fifties- but mostly the forties, and her parents told her it was that way in the 30s, too.

  10. DHM,

    Does your mother remember whether those businesses compensated for staying open late by closing at other times? When I was seven or eight (early 60s) I swept floors for my uncle, a barber in Los Angeles. He was open all day Saturday, but closed on Monday.

  11. How tacky to be a month later responding to your question- the answer is, no, she doesn’t know. She was a child and basically came into town with her folks- they lived in town (at the edge, cornfield behind their house), but had a farm and they still came into town on Saturday nights with the farmers.
    My grand-dad grew up on a farm, and his hatred of picking beans drove him to college, and he taught school and later was a principal, but they always had a huge garden, chickens (even in town) and a milk cow they kept in a shed in somebody’s barn on the other side of town. My mother does remember waiting for her dad to get home from work so they could all get in the car and drive over to milk the cow.
    She also remembers putting eggs on the train to take them to her grandmother in Chicago, where her grandmother would sell them.

  12. That was an unnecessarily long ramble of reminiscences which are hardly connected to your point. It’s entirely possible, probably likely, that stores were closed earlier or altogether on some other day to make up for the late Saturdays. I am sure none of them were open on Sundays, for instance. Our library is still not opened on Sundays, a surprising number of local businesses aren’t, and my husband’s grocery store doesn’t open until around 11:00- another one opens earlier, and my husband’s boss shrugged his shoulders and said they could have the business.

  13. Having lived for long periods of time in northern Europe, I can verify that it is also a consumer society, not all that different from the United States in that regard. Some people even experience northern Europe as more materialistic than the U.S. But in my experience it is generally a good thing to live in an area with mandated store closings. You think more when you go shopping, and if you don’t have something at a point when the stores are closed, you do without (mostly: there are some limited shopping opportunities, at gas stations and at expensive shops in train stations, and there is generally a way to obtain prescription medicine even after hours). There is never any temptation to just run to the store to buy that one ingredient you forgot on Easter Sunday, because nothing is open. (And the statement at a family meal–“sorry, I ran out of X and forgot to get it before the shops closed”–is a frequent and accepted one. No guilt for not making the extra effort to buy.) In Germany the shops used to be closed from about 1 p.m. on Saturday until 8 a.m. on Monday. Lately hours have been expanded to the entire Saturday, but the Sunday is still closed almost everywhere, except for a few “commerce open Sundays”. The feeling of peace once the shops have closed is palpable. I noticed this once again on Christmas Eve. Everything was frenetic until 1 p.m., when everything closed. Suddenly people slowed down and started smiling on their way home to be with their families. I think one could argue that the system makes one a more careful shopper. If you know you want something, you really have to make sure you can get it in time and that means looking or ordering well ahead of time, since overnight delivery, while available in Germany, is much less socially common.

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