When Jameil Joseph goes to his online shopping cart, he often clicks on the option to buy now and pay later.
Most of his friends do too, he says.
“I use them whenever they’re available,” Joseph said. “It’s always better to have extra money.”
Increasingly, online retailers are partnering with financial service providers to allow customers to make purchases, while paying only a fraction of the initial cost.
According to analysis by SIA Partners, the share of buy-it-pay-later (BNPL) in retail e-commerce was less than 2% in 2021, but is expected to double to 4% by 2025.
Apple is the latest company to enter the market, announcing on Monday that it will offer financing options for purchases made through Apple Pay. The new service, Apple Pay Later, will be available in the United States in the fall. (Apple didn’t reveal when the service is expected to be available in Canada.)
BNPL – offered by providers like Afterpay, Klarna, PayBright and Sezzle – is essentially like a point-of-sale loan, where a customer buys an item and then pays for it in regular installments over the course of a few weeks or months.
But these services are also attracting the attention of financial regulators around the world, as the industry is currently lightly regulated.
These programs aren’t exactly new — car dealerships and furniture stores have typically offered interest-free financing options for years. But BNPL loans are becoming more mainstream and better integrated with online shopping platforms, giving consumers the ability to finance almost any type of purchase with the click of a button.
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PayBright, for example, which offers BNPL services in Canada, partners with more than 5,700 retailers – including The Bay, Steven Madden and Apple – to offer interest-free six-week installment plans. According to their website, they have approved over $1.76 billion in consumer credit since their inception in 2009.
These buy-it-now, pay-later programs have been particularly successful with younger consumers, allowing them to access these loans with very few barriers.
At the same time, the growing popularity of these services is raising concerns about their impact on consumer debt.
Joseph, a 30-year-old man who lives in Toronto, says he’s got his finances under control. At the same time, he concedes that these services can entice people to spend more.
“Sometimes you know you want to buy something; instead of waiting, you can buy now,” he said.
Young people attracted by easy-to-obtain loans
It’s a message being played out on social media platforms like TikTok, where influencers partner with BNPL companies to market these services with skits, songs and dances.
“You get a bit of instant gratification, because you can see a luxury brand handbag, or a luxury brand phone, or something that may be just a little beyond what you can afford at the moment. day to day,” said Abhishek Sinha, a partner at consultancy Ernst & Young.
“But you are still able to acquire that good or service and pay for it over a period of time.”
BNPL’s growing popularity prompted the Financial Consumer Agency of Canada to conduct a pilot study last year on the use of these services. Although the results were not statistically significant due to the small number of respondents, the study found that among those surveyed, younger consumers between the ages of 18 and 34 use BNPL’s online services the most.
The main reasons consumers turned to these services were budget, inability to pay the full price of a good or service, and to avoid interest and fees.
Julia Drybrough of Winnipeg says she enjoys using BNPL’s services because they make shopping more “appetizing”.
“I buy items that I consider ‘shopping for myself,'” said the 24-year-old, who works in the service industry. “Things like makeup, shoes, and clothes that I couldn’t justify due to reduced work hours due to the pandemic.”
Safwan Zaheer, associate partner at SIA Partners, a management consultancy, said BNPL is more attractive than credit cards for some consumers.
“Buy now, pay later is a better form of credit compared to a credit card, which has common hidden fees and compound interest and penalties,” Zaheer said.
But personal finance expert Mark Ting doesn’t recommend consumers turn to BNPL’s services, saying they can encourage young consumers with little financial knowledge to overspend.
“You can fall into the trap of buying a whole bunch of stuff, spending too much, thinking those low monthly costs are reasonable,” Ting said. “And then all of a sudden you have a whole bunch of them.”
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BNPL companies often perform a soft credit check on a client before issuing a loan. However, a source of concern for critics is that unlike credit cards, the issuance of BNPL loans is not reported to the credit bureaus.
“You could have multiple loans all over the place and they’ll never talk to each other,” Ting said.
In an email, Equifax said they are currently in discussions with BNPL’s suppliers in Canada about reporting accounts to them.
A victory for retailers
Although business models differ from company to company, most BNPL companies make their money by charging retailers for purchases made through their services.
According to Swedish fintech Klarna, a major global player in the BNPL space, consumers spend 45% more when using buy now, pay later. And about the same percentage of people will make a purchase using BNPL that they would otherwise have delayed, making these services a win for retailers.
“BNPL increases orders and results in fewer undervalued baskets,” Klarna says on its website.
It basically means retailers are turning browsers into customers, Sinha said.
“They can offer their goods and services to a demographic that can’t really afford them right now. So that opens up a bigger market for them than not,” Sinha said.
A growing industry, with challenges
Apple’s entry into the BNPL space is part of the company’s fintech strategy of tying its products to financial services, Zaheer said. With the growing adoption of BNPL services, Apple sees an opportunity to increase its sales volume through Apple Pay.
The company said it would offer the option to make purchases in four equal installments over six weeks, with no interest or fees.
As more and more players enter the BNPL game, there are also concerns about profitability.
Klarna recently laid off 10% of its employees and saw its valuation drop by a third, according to Bloomberg. At the same time, Klarna expanded into Canada, with a new office in Toronto to be its North American headquarters.
What’s happening with Klarna is emblematic of the industry’s challenges, Zaheer said, due to the amount of capital required to operate BNPL, with no interest charged.
“It’s a broader concern in the industry that buy now, pay later businesses…are generally not profitable,” Zaheer said.
BNPL suppliers also face higher interest rates, increasing their costs and reducing their margins.
Another uncertainty facing the industry is regulation. The US Consumer Financial Protection Bureau (CFPB) launched an investigation last December into BNPL, ordering five major firms to disclose information about their practices in order to learn more about their operations.
“CFPB is concerned about debt accumulation, regulatory arbitrage and data collection in a consumer credit market that is already rapidly changing with technology,” it said in a statement. Press release.
Looking to the future, Sinha said regulation in Canada is likely on the way as these services become more popular.
And given consumers’ propensity for debt, Sinha said he also expects BNPL’s services to continue to grow.
“Consumers thrive on credit.”