“Seismic shift in financial services”1, “fastest-growing payment option”2, and “explosive growth”3 are terms that have been used to describe the buy now, pay later (BNPL) financing market. Technological innovations and the emergence of new fintech companies coupled with an increase in online shopping as a result of the COVID-19 pandemic4 have supported the proliferation of BNPL financing5. Although such growth may be welcomed by CEOs and shareholders of BNPL firms, it has also prompted Canadian and international regulators to examine more closely the impact of this popular financing product.
Point-of-sale lending is not a new concept; it has traditionally been offered though installment loans (generally for larger-scale purchases such as home appliances), or through white label credit cards bearing a retailer’s name, often with lower credit limits and looser credit policies. Although traditional point-of-sale lending has generally subjected consumers to lengthier in-store application processes and credit checks, modern BNPL loans can be accessed almost instantaneously at the point-of-sale (generally online). BNPL services can also be used to purchase a broader range of products and services than traditional point-of-sale lending, including less expensive products such as clothing, cosmetics, household essentials, entertainment and travel. Director of the Consumer Financial Protection Bureau, Rohit Chopra, aptly describes BNPL as “the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately, but gets the debt immediately too”6.
BNPL is attractive to merchants as it can broaden their customer base by allowing consumers to purchase goods that otherwise would not fit within their budgets.
As with installment loans, BNPL offerings enable consumers to purchase goods and services immediately, and either defer their payments for a specified period of time, or spread them out into equal, smaller installments. In Canada, these BNPL services generally fall into one of two categories: (1) online BNPL services, generally used at the point-of-sale and generally integrated into the checkout process of a partnering retailer, and (2) BNPL services that are linked to the use of a credit card which, more and more, are also being made available at the point of sale. The BNPL services offered online by lenders at the point-of-sale often allow for interest-free or lower-interest installments where partnering merchants pay fees, usually equal to a percentage of the loans7.
BNPL is attractive to merchants as it can broaden their customer base by allowing consumers to purchase goods that otherwise would not fit within their budgets. It also allows for financing to be seamlessly integrated within the merchant’s own digital platforms. Additionally, many BNPL lenders provide merchants with customer support.
BNPL products offer a meaningful alternative to other forms of credit as well as several advantages:
Convenience and ease of use. Credit is often integrated with the retailer’s product offerings and as BNPL lenders typically have less stringent eligibility requirements, credit can be rapidly granted.
More affordable credit. Many BNPL loans come with 0% interest for a set repayment period, thereby providing a cost-effective way to borrow money. Promotional offers attached to the loan may provide a longer grace period without interest. In the case of late payment, some BNPL lenders charge a late fee while others maintain a no-fee structure.
Flexible borrowing. The consumer only needs to borrow the amount required for the purchase while still benefiting from a longer grace period to avoid interest, as opposed to the more rigid structure of traditional credit cards. Additionally, it provides access to credit for some who may not have a credit card.
Positive user experience. The FCAC Study found that the majority of users surveyed found their BNPL experiences to be positive.
Considerations and oversight
Notwithstanding BNPL’s many advantages, regulators are concerned that BNPL can lead to over-borrowing and over-indebtedness and believe that the more separated consumers feel from payment processes, the less likely they are to question their purchases. In addition, there are reports that although BNPL is usually branded as a lower-interest alternative, it can prove to be expensive for the consumer if payments are delayed. Almost one-third of BNPL users have made a late payment or incurred a late fee, and that trend seems to be increasing8. In some cases, missing one payment installment results in the loss of the zero- or low-interest rate installment plan.
BNPL offerings present an additional layer of challenges to financial institutions and retailers looking to comply with the consumer protection rules in each of the provinces in which they do business.
BNPL’s rapid growth and concerns about potential consumer harm and negative outcomes have prompted international and Canadian regulators to examine this product:
The UK’s Woolard Review Report published in February 2021 concluded that “As a matter of urgency, the FCA should work with the Treasury to ensure the necessary amendments to legislation are made to bring BNPL products within the scope of regulation. Once the necessary powers are obtained the FCA will need to develop a proportionate regulatory framework including addressing how credit information should work within this market”9. The Financial Conduct Authority’s board supported the report’s recommendation and agreed that there “was a strong and pressing case to bring buy-now pay-later business in regulations”10.
In Sweden, as of July 2020 online retail platforms are prohibited from presenting credit options before debit options. As a result, BNPL offer can’t be presented as the “first choice” ahead of the lowest-cost direct payment option11.
Australia’s BNPL Code of Practice, which came into effect in March 2021, sets out “best practices” for the sector and strengthens consumer protections. In addition, the Australian Securities and Investments Commission’s Design and Distribution Obligations (DDO) regime now applies to BNPL providers, requiring them to monitor and review the outcomes of their arrangements and consider whether changes are required.
Closer to home, the United States’ Consumer Financial Protection Bureau issued on December 16, 2021 a series of orders to five companies offering BNPL credit, requiring them to file detailed information on their product offerings. The Bureau plans on reporting industry practices and risks to the public12.
And finally, in Canada, the Financial Consumer Agency of Canada (FCAC) published, in November 2021, a Pilot Study on BNPL services in Canada (the FCAC Study)13, which provides key insights into the use of these types of loans. The FCAC Study found that BNPL users tended to be between 18 to 44 years of age, and that users ages 18 to 34 are most likely to use an online BNPL service, whereas users 65 and over appear more likely to use a credit card based service. The most common reasons cited for having used a BNPL service were to help with budgeting, to enable a purchase that the consumer could not afford in their entirety right away, and to avoid interest and fees.
Consumers also expressed that BNPL services were frequently used where there was a “timing gap”, where they wanted to immediately purchase an item but knew they would only have the funds at a later date.
Although the FCAC identified potential risks of over-borrowing and over-indebtedness, the FCAC Study falls short of recommending regulations or regulatory oversight. Rather, the FCAC concludes that it will:
continue to monitor the evolution of the BNPL market in Canada and internationally, and conduct targeted follow-up research on BNPL services in Canada;
seek to coordinate with provincial and territorial oversight authorities to help support, to the extent possible, the sharing of insights and expertise and the harmonization of approaches to oversight; and
continue to provide consumers with access to timely, effective, and unbiased educational information on BNPL services to foster responsible use of BNPL services.
Outside Canada, claims have been made that the BNPL market is unregulated or underregulated. However, Canadian lenders, including those that offer BNPL services, are still subject to certain regulations and oversight.
While Canadian financial institutions are accustomed to different and sometimes conflicting rules regarding the presentation and charging of interest and fees, BNPL offerings present an additional layer of challenges to financial institutions and retailers looking to comply with the consumer protection rules in each of the provinces in which they do business. For instance, while some provinces take a more liberal approach, others, such as Québec, place strict limitations on how credit can be advertised in conjunction with advertisements for consumer goods. These rules can have an impact not only on the content of disclosures, but also on the timing of the credit offering within a transaction flow.
Where BNPL is associated with a credit card, special consideration must also be given to the effects of rules regarding grace period, minimum payment and monthly statement requirements, especially when the conversion to a BNPL plan is done separately from the transaction itself. The effects of full and partial returns of orders for goods must also be considered.
Notwithstanding the various concerns and risks associated with BNPL lending, it is likely here to stay; Canada’s BNPL market is expected to grow by 41.1% to $3.6 billion USD in 2021, with a year over year expected growth of 14.7% to reach an estimated $9.4 billion by 202814. 2021 was also a busy year for transactions and partnerships involving key players in the space, such as the acquisition by Affirm (a U.S. BNPL lender with partners like Shopify and Peloton) of PayBright (a Canadian BNPL lender)15, Square’s announced acquisition of Afterpay (an Australian BNPL lender)16, PayPal’s plan to acquire Japanese BNPL firm, Paidy17, and Affirm’s partnership with Amazon to build certain BNPL options into Amazon’s checkout process18.
Banks have recently demonstrated a desire to compete with these online BNPL lenders; a number of Canadian banks launched their own installment payment or loan programs in 2021, and Visa has launched Visa Installments where, in partnership with banks who issue Visa credit cards, customers can opt to divide payments on purchases from big ticket items to everyday groceries.
We expect that the coming year will bring continued deal activity and increased availability of BNPL services in Canada.
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This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.