Interest-free installment payment financial technology (fintech) companies are the layaway plans of the mobile-first generation.
They promise to change consumer behaviour by making immediate gratification appear less risky and more attractive, motivating us to spend (much!) more. Can this alternative payment method revolutionize the credit industry? Or do these companies represent a new breed of loan shark poised to ensnare millennial shoppers loading up their online carts?
These firms essentially invert the familiar alternative--saving money in modest monthly increments for a major purchase. They engineer the reverse: you can purchase that Peloton *now* and pay it back over three years at 0% interest. (In fact, more than a third of the revenue of Affirm, a major player in the industry, comes from Peloton.)
This is sometimes referred to as a “buy now pay later point-of-sale (POS) micro-loan” or just the abbreviated “BNPL.” The new-ish offer of payment flexibility at ‘no additional cost’ provides consumers with newfound purchasing power. As the lending programs are not credit-card based, they do not necessarily require a hard credit check and they do not affect a shopper’s credit score. This is particularly relevant for younger people, who may have insufficient credit history for credit card approval.
It’s a creative innovation: effectively, these programs shift the cost of borrowing onto the merchant, requiring them to pay the BNPL lender a percentage of the sales price (as much as 6%). For most merchants, it’s more than worth it: retailers benefit from an increase in shopping cart size (~30%), a decrease in abandonment at checkout (~25%), and repeat customers (~20%).
PayBright, one such platform based in Canada, was named the country’s FinTech company of the year in 2019. Paays, Flexiti and Uplift are three other Canadian examples, while Afterpay, Klarna, PayPal’s “Pay in 4” and Sezzle are based in the U.S. and Sweden.
Upon a closer look, the Canadian companies seem a little more regulated than their American peers.
Flexiti offers private-label credit cards with a 0% financing option.
Paybright doesn’t have a credit check for their “pay in 4” repayment plans, but a “soft” credit check may be conducted when someone applies for a monthly repayment plan, and Paybright will conduct a “hard” credit check when you enter into a loan agreement, and any interest on the amount you borrow to finance your purchase will start accruing only once the loan has been issued.
Paays’ pre-qualification lasts 60 days and offers a “virtual Mastercard” to complete a purchase. Their 6-month (0%) or 12-month (9.99%) financing plans are offered on approved credit by Fairstone Financial.
Uplift is travel-focussed, and the annual percentage rate (APR) ranges from 7.00% to 31.99%.
In Ontario, the Payday Loans Act was passed in 2008 and brought into force in December 2009. The legislation helps to protect people that take out payday loans. Under the act:
you can’t be charged more than $15 for every $100 that you borrow;
you can’t be sold or offered any goods or services in connection with the payday loan;
you have two business days to cancel a contract for a payday loan without any penalty (e.g., without paying a fee) and without having to give a reason;
“rollover” loans are not allowed (this means you can’t roll what you owe on a payday loan into a second payday loan. This is because you can’t get another payday loan from the same lender before paying your first loan in full).
It seems to me that BNPL lenders don’t fall under the act and thus do not need to register as payday lenders, because they are loaning money to the merchants, which indirectly flows to shoppers.
*A loan shark is an illegal money-lender who makes it their business to profit from lending money but who is not licensed or regulated by authorities.
These fintech firms feel new enough that we haven’t seen what it’s like for the consumer if they miss the repayment schedule. For one, defaulting won’t necessarily influence their credit score as the lending can occur independent of it, even though failing to repay on the schedule is a standard consideration for credit scores. And since the money is loaned to the store itself, it’s the retailer’s responsibility to pay the lender, under the premise that it will earn them a new customer that they may have not received otherwise.
What happens if you don’t repay on the right schedule?
Some providers will ask for a settlement fee or a lump sum of interest may be added to the debt.
On top of that, you may be charged late payment fees too. Missed payments *could* also be recorded on your credit report and affect your credit score.
The most common form of non-monetary recourse used by BNPL providers to incentivize repayment from consumers has been to freeze future borrowing from the provider until the outstanding late balance is repaid.
Would the retailer need to hire a collections agency?
It seems that some resort to connections agencies if needed.
Could they attempt to repossess their product?
Probably not going to repossess a mattress, piece of furniture or clothing. It could just be too much of a hassle for the retailer, making them comfortable with the “sunk cost” of loaning the $$.
Or, is this risk just the cost of doing business?
Possibly. The incentive for the retailer is to sell more merchandise, which seems to be happening with these programs.
So, is this new kind of no-strings-attached upselling via little unsecured loans a form of predatory lending?
Snagging a new mattresses, a couple of pieces of furniture, and some new clothing without a hard credit check is breezy. But each time you’re approved for a new micro-loan engagement, the retailer may be unable to access any information on how many of these micro-loans are in play at any one time and the borrower isn’t obligated to disclose that.
As with a typical personal loan, most lenders will ask for your banking information so that they can take the payments directly from your account via a pre-authorized debit. This means that these companies can essentially pay themselves back with access to your bank account.
For now, it all comes down to whether we can and should trust these micro-loaners (ha) to not overburden people with recurring payments. I do note that Affirm wants to abolish late fees.
Will we see fintechs offer no-interest installment mortgages, or no-interest student loans?
An ‘affordable’ interest-free loan is preferable to credit card debt. But Canadians already owe an average of $1.71 for every dollar of disposable income. Saving to have the cash on hand for a major purchase is preferable to both.
Consumers can leverage many different BNPL providers spread over different purchases.
Compounding the challenge: abuse of these programs can be viewed as more of a people problem than a technology issue - it’s someone’s own “fault” if they over-leverage themselves with bite-sized micropayments. Typically the Ontario Securities Commission and Ontario Consumer Protection ministries have guidance and guardrails to mediate someone’s new debt load. ]
Know what else is expensive? Regulatory lag. The wait-and-see. The problem admiration, or worse - dismissing these new tools as a trend that isn’t worth our attention until….later.
By failing to categorize these firms properly - i.e. lumping them under the exciting banner of fintech and clapping for Canadian companies as they grow - we may be failing to offer consumers the protection that they deserve.
And for that, we will pay later, too.
A new kind of micro-lending enables merchants to offer large purchases at 0% interest (layaway in reverse);
Because the funds are technically loaned to a store and not directly to a shopper,
We need more information on the volume of BNPLs that shoppers may be taking on, alongside their other debt commitments;
The Financial Consumer Agency of Canada has noted that in Canada most instalment plans currently offered are repackaged retail credit cards or personal loans; however, the competitive landscape is changing.
💡 Policy ideas
Proactive regulations that specifically govern the actions of BNPL providers may be beneficial to protecting Canadian consumers’ financial health.
properly inform consumers on the structure and potential costs of the instalment plan;
conduct risk assessments to prevent users from overextending themselves financially;
not charge unreasonable fees;
coordinate with each other on consumers’ usage across services to determine whether the user has defaulted with any of them;
provide financial assistance services.
‘Pay later’ products take off this year as PayPal, Microsoft allow customers to delay the bill
Davis Law - Buy now, pay later: Instalment payment fintechs in Canada
Buy now, pay later? Instalment payment services for online shopping come to Canada
Consumer protection information for credit, loans and debt collection
No money down: New financing companies are transforming online shopping by offering pay-later options for small purchases
Be wary of the risks of using buy now, pay later programs for small purchases, experts warn
Vass Bednar is the Executive Director of McMaster University’s new Master of Public Policy in Digital Society Program.
Good idea for a newsletter! I have seen these everywhere too but never thought much about it...
I'd seen these pay-later offers and been idly curious about them--thanks for writing such a succinct and interesting post about them!