Angela Olaguera-Corcoran had long admired handmade gold filigree earrings from Cambio & Co., a small Canadian company that works with artists in the Philippines. She saw the earrings as a connection to her family’s heritage and liked the idea of supporting an independent business run by women. But the price was out of reach, until, during the pandemic, the company started using the provider Sezzle, buy now, pay later, or BNPL.
“I couldn’t deposit $200 at once, but I was able to split it into $50 payments [every] two weeks,” she says. “It made these pieces more affordable and accessible for me.”
Olaguera-Corcoran is one of the 30 percent of Canadians who are comfortable using BNPL for an online purchase. BNPL installment plans, a form of loan that allows consumers to divide a purchase into a series of smaller, interest-free payments over a set period of time, grew rapidly in popularity during the pandemic along with the boom in extensive electronic commerce. But while they are an increasingly common payment option for retailers across Canada, experts say they pose risks, such as encouraging indebtedness and overspending for shoppers, especially younger ones who may be less financially savvy.
The rise of platforms buy now, pay later
The BNPL trend began with Australian fintech company Afterpay in 2014 and has since fueled the fortunes of a growing number of startups. In 2017, Canada first BNPL platform PayBright was launched in the country and international companies soon entered the market: based in Minneapolis Sezzle became available in Canada in 2019, based in San Francisco Affirm in 2021Y in February, Swedish lender Klarna entered the Canadian scene. In June, Apple also announced the development of your own BNPL program through Apple Pay.
“There is a lot of appeal, particularly from the younger generation. They think: ‘Why would I pay the full amount now if I can pay a little bit per month and not pay interest?'” says Brigitte Goulard, group head of fintech and consumer protection practice at Torys LLP, and former deputy commissioner of the Financial Consumers Agency of Canada, or FCAC. Research shows that BNPL users tend to be millennials or Generation Z buyers: a recent FCAC study found that the largest group is between the ages of 18 and 44, and UK data. revealed that 75 percent of users are adults under the age of 36. This is probably why companies are using influencers on TikTok and Instagram to promote BNPL rigs to buyers and hire celebrities like ASAP Rocky Y Ashley Graham as brand ambassadors.
Part of the charm of BNPL is the interest-free payments. Companies are able to offer zero interest to shoppers because they make money by charging retailers transaction fees, usually at a much higher rate than credit card purchases, which are in the range from 1.5 to 3.5 percent per transaction. Sezzle, for example, charges 6.1 percent plus 30 cents per transaction, while Paybright’s rate is 8.95 percent plus a 1.95 percent credit card fee if consumers pay that way. .
While these fees are steep, BNPL has clear benefits for retailers, according to RBC Capital Markets research from November. Increase retail conversions by 20-30 percent and increase average cart amounts by 30 to 50 percent. Affirm claims that your merchants reported an 85 percent increase in average order amounts when shoppers choose to use its BNPL plan over other payment methods, and that the platform increases repeat purchases by 20 percent.
The risk of buy now, pay later plans for buyers
For consumers, buy now, pay later is not without risk. Experts in personal finance and consumer protection say that seeing lower premium amounts can cause shoppers to perceive an item’s price as lower than it is. And unlike traditional payment plans for much larger purchases like appliances, which were previously made in-store and required a lengthy application process, consumers have near-instant online approval at the point of purchase with plans BNPL; usually you don’t need a good credit score as most providers do not perform credit checks.
The FCAC said in November buy now pay later pilot study platforms that these factors are a recipe for overspending and put consumers at risk of racking up debt. The study, which surveyed more than 1,000 Canadians, found that users typically turned to payment plans to address a “time gap” when they didn’t yet have the funds for an unexpected purchase.
While 95 percent of users in the study made their scheduled payments on time, 15 percent of those surveyed had made “unfavorable” financial concessions to do so, such as delaying another bill, overdrawing their bank account, or asking for borrowed funds. of friends and family.
Additionally, buyers may face fees if they fall behind on payments or risk being turned down for future loans with the BNPL provider. Goulard points out that while these loans don’t help consumers build their credit score, they can hurt it in the event of late or missed payments.
To help cushion abuse, BNPL providers say they don’t approve all requests. Afterpay says on its website that it checks whether a customer has sufficient funds on their card, how much they have to pay, and how many orders they have open with the platform. Klarna performs soft or hard credit checks depending on the payment plan the customer signs up for. (Soft credit checks are for pre-approved offers and do not affect your credit score or require your permission to run. A hard credit check is for when the lender is evaluating whether to give you a loan, which requires your consent and may affect your credit score).
Shannon Lee Simmons, certified financial planner and founder of the New School of Finance, warns consumers to think carefully about whether they really want or need what they are buying. While BNPL plans can be useful for necessary emergency purchases or used responsibly for budget reasons, she sees these platforms as part of the “extreme consumerism” culture that is driving rising debt levels and the financial anxiety. “Consumer spending is really intense and people feel like they can’t keep up,” she says. Simmons says he’s seen his customers’ stress skyrocket after buying something online that they later regret, often because they don’t think before they buy, a mindset that BNPL options can encourage because buying this way makes items appear cheaper than they really are. are.
To avoid that financial anxiety, he recommends buyers figure out if they can comfortably meet their installment payments and pay off their purchase in a reasonable amount of time. It’s also important to keep track of when payments are due. Olaguera-Corcoran says he signs up for his purchase now, pay later text alerts from the provider that warn him he must pay a few days in advance, and has set limits on how he uses these plans. Installment payment on a BNPL purchase has to fit into the “fun money” portion of your biweekly paycheck (about five percent) and you have to pay off one purchase before considering another.
BNPL’s cheating has already attracted the attention of regulators. Last year, the US Consumer Financial Protection Bureau said it would open an investigation into BNPL platforms in December and consumer groups in the UK warned the government not to allow companies to self-regulate, as they have done, saying the approach has been “woefully inadequate in curbing consumer harm”. (The The British government announced was strengthening regulation of BNPL deals in June).
In Canada, BNPL plans are already technically regulated as loans, and lenders are required to disclose any interest or fees associated with the product. But Goulard says he still hopes to see more regulatory interest in the country. While the FCAC study stopped short of recommending any additional regulatory action, he said he would coordinate with provincial and territorial oversight agencies to harmonize oversight of these plans and encourage consumer education.
Loans, mortgages, and credit cards present similar risks to buy now, pay later platforms, which is why they are regulated. For example, to get approved for a loan in OntarioApplicants must prove their income, undergo a credit check, and disclose any debts. Still, that screening process doesn’t prevent huge consumer debt, Goulard says. What is needed as a whole is more financial education so that people fully understand the risks of all financial products, including BNPL platforms. “There needs to be more awareness among consumers about how to avoid debt,” says Goulard.