The Dangers of Using Buy Now, Pay Later Platforms

Angela Olaguera-Corcoran had long admired the gold filigree earrings handcrafted by 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 she loved the idea of ​​supporting an independent women-led business. But the price was simply out of reach – until, during the pandemic, the company started using the buy now, pay later, or BNPL provider, Sezzle.

“I couldn’t deposit $200 at a time, but I could split that into $50 payments [every] two weeks,” she said. “It made these pieces more affordable and accessible for me.”

Olaguera-Corcoran is one of 30% of Canadians who are comfortable with BNPL for an online purchase. BNPL installment plans – a form of loan that allows consumers to split a purchase into a series of smaller, interest-free payments over a period of time – have rapidly grown in popularity during the pandemic, alongside the broader boom in the e-commerce. But while they’re an increasingly common payment option for retailers across Canada, experts say they come with risks, like encouraging debt and overspending for shoppers, especially the most young people who may have less financial knowledge.

The Rise of “Buy Now, Pay Later” Platforms

The BNPL trend started with Australian fintech company Afterpay in 2014 and has since boosted the fortunes of a growing number of start-ups. In 2017, Canada first BNPL platform PayBright was launched in the country and international companies quickly entered the market: Minneapolis headquarters Sezzle became available in Canada in 2019, based in San Francisco Affirm in 2021and in February, the Swedish lender Klarna is entering the Canadian scene. In June, Apple also announced the development of its own BNPL program through Apple Pay.

“There is a lot of appeal, especially from younger generations. They think, “Why should I pay the full amount now if I can pay a little a month and not pay interest?” Financial Consumer Agency of Canada or FCAC. Research shows that BNPL users tend to be Millennials or Gen Z shoppers: a recent FCAC study found the largest age group is between 18 and 44, and UK data. revealed that 75% of users are adults under the age of 36. This is probably why companies are use influencers on TikTok and Instagram to promote BNPL platforms to buyers and hire celebrities like ASAP rocky and Ashley Graham as brand ambassadors.

Part of BNPL’s appeal is the interest-free payments. Companies are able to offer zero interest to shoppers because they make their money by charging retailers transaction fees, usually at a much higher rate than for credit card purchases, which are in the perimeter 1.5 to 3.5 percent per transaction. Sezzle, for example, charges 6.1% plus 30 cents per transaction, while Paybright’s rate is 8.95% plus a credit card fee of 1.95% if consumers pay that way.

Although these fees are high, BNPL has clear advantages for retailers, according to a November study by RBC Capital Markets. It increases retail conversions by around 20-30% and increases the average shopping cart size by 30 to 50 percent. Affirm says its merchants report an 85% increase in average order value when shoppers choose to use its BNPL plan over other payment methods, and the platform increases repeat purchases by 20%.

The risk of buying now, paying later for buyers

For consumers, buying now, paying later is not without risk. Personal finance and consumer protection experts say seeing lower installment amounts can cause shoppers to perceive an item’s price to be lower than it is. And unlike traditional layaway plans for much larger purchases such as appliances, which used to be done in-store and required a lengthy application process, consumers enjoy near-instant online approval at the point of sale. with BNPL plans; you usually no need for a good credit score like most vendors do not run credit checks.

The ACFC said in November pilot study of buy now, pay later platforms that these factors are a recipe for overspending and put consumers at risk of accumulating debt. The study, which surveyed more than 1,000 Canadians, found that users typically turn to payment plans to fill a “time gap” when they don’t yet have the funds for an unexpected purchase.

While 95% of users in the study made their scheduled payments on time, 15% of those surveyed had made “adverse” financial compromises to do so, such as delaying another bill, incurring an overdraft in their bank account, or borrow funds. from friends and family.

Additionally, buyers may face fees if they are late with their payments or risk being turned down for future loans with the BNPL provider. Goulard notes 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 guard against inappropriate use, BNPL’s suppliers say they don’t approve all orders. Afterpay states on its website that it checks whether a customer has sufficient funds on their card, how much they need to refund, and how many orders they have opened 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 execution clearance. A hard credit check takes place when the lender assesses whether to grant you a loan, which requires your consent and may impact your credit score.)

Shannon Lee Simmons, Certified Financial Planner and Founder of 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 emergency purchases needed or used responsibly for budgetary reasons, she sees these platforms as part of the culture of “extreme consumerism” that leads to rising levels of debt and financial anxiety. “Consumer spending is really intense and people feel like they can’t keep up,” she says. Simmons says she’s seen her customers’ stress skyrocket after buying something online that they later regret, often because they don’t think before making the purchase — a mindset BNPL options can be encouraging because buying this way makes the items cheaper than they are.

To avoid this financial anxiety, she recommends buyers calculate whether they can comfortably meet their installment payments and pay off their purchase within a reasonable time frame. It is also important to know when payments are due. Olaguera-Corcoran says she signs up for her purchase now, pays later for vendor text alerts that warn her a payment is due a few days in advance, and has set limits on how she uses these plans. The installment payment for a BNPL purchase should go into the “play money” portion of her paycheck every two weeks, about 5%, and she should pay off one purchase in full before considering another.

BNPL’s traps have already caught the attention of regulators. Last year, the US Consumer Financial Protection Bureau said it was opening an investigation into BNPL platforms in December, and UK consumer groups warned the government against allowing businesses to self-regulate, as they had been, saying the approach was ‘woefully insufficient to limit harm to consumers’. (The The British government has announced it tightened the regulation of BNPL agreements in June.)

In Canada, BNPL plans are already technically regulated as loans, with lenders required to disclose any interest or fees related to the product. But Goulard says she still expects to see increased regulatory interest in the country. While the FCAC study refrained from recommending any additional regulatory action, it said it would coordinate with provincial and territorial oversight bodies to harmonize oversight of these plans and promote consumer education.

Loans, mortgages, and credit cards pose similar risks to buy-now-pay-later platforms, which is why they are regulated. For example, to get approved for a loan in Ontario, applicants must prove their income, submit to a credit check and disclose their debts. Yet this selection process does not prevent consumers from being in huge debt, Goulard says. What is needed in parallel is greater financial education so that people fully understand the risks of all financial products, including BNPL platforms. “Consumers need to be more aware of how to avoid debt,” says Goulard.

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