Canada does not require BNPL services to conduct affordability checks, a regulation the British government will implement in 2026.Loren Elliott/Reuters
Rob Csernyik is a contributing columnist for The Globe and Mail.
Nobody needs a burrito badly enough to pay for it in multiple installments, yet this is the world we’re living in today.
Anyone shopping online in recent years has noticed the rise of buy-now-pay-later options such as Affirm AFRM-Q, Afterpay AFTPY, Klarna and Sezzle SEZL. An option appears near the end of a transaction promising instant approval to split payments up with no interest or fees. The spending possibilities are nearly infinite – from fast fashion to groceries and, as of March in the United States, food delivery from the DoorDash app.
But while BNPL services became household names as online shopping surged in the pandemic and new businesses signed up in droves, they brought a new slate of challenges with it that regulators are slowly catching up with.
Last month, the British government stepped in to fix what its Economic Secretary to the Treasury, Emma Reynolds, calls “a Wild West.” It deemed the industry to have too few rules, leaving consumers exposed.
Regulations which will come into effect next year include affordability checks to ensure borrowers have the capacity to repay and to require the financial ombudsman’s office to accept complaints about services alongside those about banks. Presently neither of these regulatory requirements exists in Canada. We’re overdue for similar oversight of the BNPL industry to ensure Canadians aren’t getting in over their heads.
There is, no doubt, some value to BNPL models. They can help some consumers who might have limited or no credit available, yet are solvent enough to cover their layaways. But while research suggests a large number of BNPL consumers use the services responsibly, a wide swath is changing their spending habits – and not for the better.
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This is, in part, because the services create a false sense of affordability. Purchases that might have once been saved for or made only when discounts brought the item within budget, can be initiated for a down payment. Installment payments – often broken into four paid biweekly – creates a separation from the sticker price.
Researchers have found BNPL users have a higher tendency to impulse shop. The Klarna for Business webpage proclaims partner businesses experience “46 per cent higher purchase frequency than average shoppers” when using its BNPL service. Average orders are a healthy 23 per cent higher, to boot.
While good for BNPL companies, this can be bad for consumers. In 2023, the U.S. Consumer Financial Protection Bureau reported BNPL users as “on average, much more likely to be highly indebted, revolve on their credit cards, have delinquencies in traditional credit products, and use high-interest financial services such as payday, pawn, and overdraft compared to non-BNPL borrowers.”
It also found that many differences between BNPL and non-BNPL borrowers predated use, suggesting the services may be more attractive to consumers with less budgeting and financial literacy.
A research study from the Financial Consumer Agency of Canada found 42 per cent of respondents said the top reason they use the service is to help them budget. Some users probably don’t realize their belief in their ability to budget successfully using the tool is misplaced.
Horror stories of overspending and misuse abound on internet forums – but only if you go looking for them. The common theme to these stories of overspending or credit default is a lack of understanding of what the consumer was getting into when using the products. This isn’t farfetched.
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When Afterpay entered the Canadian market in 2020, its chief executive officer touted that Canadians could use their own money over time “instead of turning to expensive loans with interest, fees or revolving debt.”
This framing is consistent in advertising and the public imagination – BNPL services are at no cost and don’t entail the same consequences as defaulting on credit or loans. On both counts, this is wrong. For users who don’t pay on time, there are late fees, and if a default occurs a collection agency may come calling to get you to pay the debt.
While BNPL services weren’t always featured on credit reports, in Canada, Equifax collects BNPL data from some lenders “which may be used to calculate credit scores,” according to the company. A TransUnion spokesperson says the company is “creating a separate section on the credit report for this information,” though it does not currently affect credit scores. The consequences look a lot like any other loan.
With delinquencies on non-mortgage debt in Canada reaching levels in the first quarter unseen since 2009, it’s necessary to follow Britain’s footsteps in taking steps to protect consumers and make sure those who use BNPL services won’t be surprised by the potential hidden costs of their so-called cheap and easy loans.