You’ll see it at a growing number of online checkouts: a small logo accompanied by a message offering you the option to pay in instalments. If you’re buying from furniture e-tailer Wayfair, the company offering that service is Klarna — which is also available at Sephora or Urban Planet. If you’re buying office clothes from Kit and Ace, shoes from Call It Spring, or workout gear from Lululemon, it’s Afterpay. There are also a few other companies you may encounter while shopping online— Sezzle, Affirm, or Paybright. (A few banks also offer a form of BNPL services, but we won’t be covering them here.) So where did these services come from — and what do they do?
What is a buy-now, pay-later service?
The pandemic brought many changes to how Canadians buy things. One emerging trend is the uptake of so-called buy-now, pay-later (BNPL) services. Forecasts suggest the industry will keep growing; according to one estimate, it’s poised to expand by 20 per cent in 2023.
“Very simply, buy now, pay later is a form of short-term loan,” says Stephen Yun, senior analyst at Payments Canada. Like old-fashioned layaway services, Yun says, it’s a way of affording a purchase by paying for it in instalments. Unlike layaway, however, you get your purchase right away — and the intermediary isn’t the company you’re buying from, but a third party. “The buy-now, pay-later provider is the principal money lender,” Yun says.
Companies that offer this service are mainly fintech companies, he says — intermediaries that make their money by offering a technology-based service that streamlines or creates an advantageous process in the retail sphere. In this case, they offer short-term loans to consumers and make their money by taking a cut from the retailer rather than by charging interest, which is how more traditional forms of instalment loans, such as car loans, work.
That cut can be pretty significant, Yun says: between 2 per cent and 8 per cent. (By comparison, the average interchange fee charged to retailers for purchases made by Visa cards in Canada is 1.4 per cent, according to the company.) But BNPL can be worth it for retailers, he says: “Empirical evidence … has shown that their customers are more likely to make a purchase.” The likelihood that customers will spend more than they might have otherwise and return to make other purchases also increases. So having partnerships with BNPL services — often more than one of them, as in the case of Sephora, which also partners with Afterpay — is a good way to capture market share.
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How does it work?
To use a buy-now, pay-later plan, select that payment option at checkout and follow the prompts. You’ll be taken to the BNPL provider’s website to sign up for its services, and it will probably run a soft credit check (one that doesn’t have the potential to impact your credit score) before okaying you. You’ll agree to payments over a set term and provide a payment method, usually either a debit or a credit card. Then the third party will pay the retailer for your purchase, and you’ll make your first payment to the BNPL provider.
“These payments are structured in equal instalments, and the payment due dates follow a preset schedule,” Yun says. The first payment is due at checkout, and future payments may be on a biweekly (every two weeks) or monthly schedule. The length of time you spend paying — known as the payment term — varies, but six-week payment terms were the most common until recently, he says, adding that longer terms are becoming more common.
What are the potential issues?
By signing up, you’re giving the BNPL provider permission to debit its payment from your card or agreeing to pay them on a specific date (the exact details vary from service to service). If there isn’t enough money in your bank account, or your credit card is maxed, you may be charged an insufficient-funds fee by your bank or credit company. But, unlike credit card companies, most BNPL services don’t charge interest on late payments, Yun says. Instead, they might work with borrowers to negotiate a payment schedule. They’re more interested in having people continue to use their service and getting that cut from retailers.
Even though the pitfalls are usually different from those of a credit card, there are still things to think about when using BNPL. “If consumers miss or are late in making payments, they can incur fees or be sent to collections,” Yun cautions. “This, in turn, can negatively impact credit scores.”
A spokesperson from Consumer Protection Ontario, a program that’s part of the Ministry of Public and Business Service Delivery, tells TVO Today via email that BNPL plans “are often presented as a more affordable way for consumers to acquire certain goods. However, the price paid for the goods or services over time may exceed what the consumer would have paid if the goods or services had been purchased directly or financed from another source such as credit cards or banks.” Consumers should carefully look at the terms of service to make sure they know how much they’ll be paying, they wrote.
And, in a sense, a single BNPL purchase isn’t just a single purchase. It’s the beginning of a relationship with the company. Once you’ve gone through the approvals process, you’re signed up, and that means you can make other purchases using that service. You’re in the system, and the service maintains access to whatever personal information you’ve given it.
Beyond all that, remember why retailers team up with these providers in the first place: access to these services has been shown to boost spending and impulse purchasing. That could get you in trouble, too.
Who’s using BNPL services?
About 9 per cent of Canadian consumers used these services last year, according to Payments Canada’s internal research, Yun says. This year, it expects that number to go up to about 11 per cent. Compared with places like Australia and the United Kingdom, where BNPL services have been entrenched for much longer, that’s not a huge number, he says. But when you consider who in Canada is using BNPL, the story changes: Payments Canada has found that 14 per cent of consumers 18-34 have used BNPL and 17 per cent intend to use it in the next 12 months.
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That number lines up with some preliminary research conducted for the Financial Consumer Agency of Canada between 2019 and 2021. A survey of 1,034 Canadians older than 18 years found that the 66 people surveyed who reported using BNPL services tended to be younger. (The report cautions that a sample of 66 users can’t produce statistically significant conclusions about Canadian consumers.) One likely reason young people are attracted to these services is that they may not yet be able to qualify for a credit card, Yun says, and BNPL offers an alternative.
The FCAC also offers a BNPL primer for consumers. The federal government agency declined to speak to TVO Today about BNPL and referred us to the province.
So should you use a BNPL service?
Good question. If you’re certain you’ll be able to make your payments on schedule, there’s no specific reason not to use them, Yun says: “The main benefit is that you’re not paying interest on the payments you make.” So they may be a useful tool. In addition, if you have difficulty accessing credit, they may offer an alternative.
But there isn’t a lot of explicit regulation around the use of these services in Canada, and that means policymakers here are still defining their stance toward them. Unlike credit cards, for instance, BNPL providers also don’t legally have to consider whether you’re likely to be able to repay the loan they’re granting, so they can allow you to borrow more money than you’d be able to pay off. “As a result,” Yun says, “consumers can potentially find themselves getting into an unmanageable debt load, especially if they use multiple buy-now, pay-later services.”
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