Inside the new era of ‘Buy Now, Pay Later’

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Jordan Unless you’ve somehow managed to get through this pandemic without buying something online, you’ve seen them. You’ve probably even been tempted. Maybe you were just browsing saving things you like in your cart for later on some clothing or kitchen website. You probably didn’t even really have the cash, you were just looking. But there it was, a little button that tells you you don’t really need all the cash right now, you just need 25% of it. You can pay the rest in installments. So why not? I’m sure this wasn’t your first offer to buy now and pay later. Humans have been doing that as long as capitalism has existed in some form or another. But the companies that slipped those little buttons right onto checkout pages might be the most frictionless example of buy now, pay later ever designed. And so the industry is growing fast. What do you need to know about the companies in this business? Is there anything hidden in their fine print? How are they regulated? How do they get their cut? And what is in it for you or the retailer that you’re buying from to let that little button come between you? I’m Jordan Heath-Rawlings. This is The Big Story. Kelsey Rolfe is a Toronto-based business reporter and editor. She has experience covering work and labour, mining technology and personal finance. She wrote about the new era of buy now, pay later for Canadian Business. Hey, Kelsey.

Kelsey Rolfe Hi, Jordan. Thanks for having me.

Jordan You’re welcome. Maybe we could just start with a description of what buy now, pay later is on the internet currently because it used to mean a whole bunch of different things and this is a new iteration of it.

Kelsey Rolfe Yeah, exactly. So I think the best way to describe buying a pay later plan is it’s actually a loan, even though I think many people wouldn’t really think of them like that. But it’s a loan that allows you to break up one larger payment into a series of smaller and interest-free payments. You know if you bought something online in the past couple of years, you’re probably at least passing familiar with it. It’ll be in the space where you see the cost of an item you’re considering if a retailer offers. And so, you know as you mentioned, it can kind of mean a bunch of different things. So the tagline for buy now, pay later started as like four easy payments of whatever the amount was, and the user would kind of make the first payment purchase and then pay the rest, I think every two weeks. But that’s kind of expanded a bit beyond that now to a longer time frame. So I’ve seen things like six payments or even payment plans over like 13 months or 24 months for a larger item.

Jordan So speaking of larger items, then you mentioned basically anytime you’ve bought something online, you might have seen what kinds of things are financed through these companies.

Kelsey Rolfe Yeah. So I take a step back and say this is a bit of a modern twist on the deferred interest in layaway plans that were and still are available at like appliance stores or furniture stores.

Jordan Right. I was going to ask how this is different from layaway or the traditional version of department store layaway.

Kelsey Rolfe Right, yeah, exactly. So I mean, beyond the fact that you might be deferring the interest in that case or you are not getting the item immediately. In this case, you get the item immediately, you just pay it off more slowly. But when it comes to what’s offered or what you can use buy now, pay later for, they tended to start with items that are at a lower price point than those more traditional plans so things like clothing, beauty products and home goods like you’ve seen like H&M, Sephora, other kinds of retailers like that pick up on this and that’s also now expanded to more expensive consumer goods like electronics and that kind of tends to be where you get into little longer term payment plans of like many months. I was going to say actually I’ve also heard of buying a payload or being used for trips or experiences. I think my personal favourite is that you can even use it for a premium cut of beef if that’s your thing.

Jordan You can pay later for the meat you eat today. Yeah, exactly. So let’s get into the weeds just a little bit so people can understand how this works. You mentioned that it’s not that different from a loan. Can you just give me a basic breakdown?

Kelsey Rolfe Yeah, so I think the difference that I would point to is that the really obvious one is that consumers don’t pay any interest. So whatever the after-tax cost of your purchase is what you will pay back, unlike with a traditional personal loan or a mortgage or whatever where you’re paying interest on the funds you borrowed and also when you’re applying for traditional financing, you usually need to go through like a fairly rigorous application. You undergo a credit check, but in most buy now, pay later plans, you’re going to get approved very quickly and you’ll have kind of mostly a soft credit pull rather than an actual credit check. I want to say this isn’t true in all cases. The longer-term payment plans tend to require an actual credit check and many providers say they don’t approve everyone to guard against problematic use of this financing. But largely there’s a much lower barrier to entry and you don’t typically need to have a good credit score.

Jordan I’m just curious now quickly, what is a soft credit pull?

Kelsey Rolfe So basically soft credit checks are for pre-approved offers. They don’t impact your credit score and they don’t require your permission for the lender to actually do that. And the hard credit check is what we’re really familiar with when we talk about credit checks, it’s like the lender is assessing whether to give you a loan, and so they need your express consent, and actually doing that credit check can impact your credit score. So it’s a little bit different.

Jordan I see. So do we have any idea now and I assume because we’ve done many episodes about various online things going through the roof during the pandemic, I’m assuming this is no different because I know online shopping has, but do we know how widespread these companies are now? What’s the usage rate?

Kelsey Rolfe Yeah, so I think we’re seeing it becoming pretty popular in Canada. And you know as you alluded to, it’s been kind of alongside the broader boom in e-commerce. And so there was a study that the Financial Consumer Agency of Canada did last year, and they kind of found that 8% of Canadians have used buy now, pay later between March 2019 and September 2021. And if we fast forward to this summer, there was a MasterCard survey that said roughly 30% of Canadians were comfortable with buy now, pay later. So that’s like a pretty significant growth in about less than a year’s time.

Jordan Who are the major players? Who are the companies we need to be familiar with here?

Kelsey Rolfe So the names you probably want to know are, like, Afterpay, which is an Australian company, and they kind of kicked off this trend. I believe they were founded around 2014. And then in Canada, we have PayBright as a Canadian company. And then there’s also Clarna, Affirm, Cecil and like, operating in the spaces is pure buy now, pay later. And then recently, Apple actually announced it was going to develop its own programs through Apple Pay. Yes. Before they were using I believe it was Affirm and now they’ve seen I guess they’ve seen the potential in this, and they’re doing it on their own.

Jordan So what is the potential in this for companies? You mentioned that they don’t charge interest on the purchase or how do they make money?

Kelsey Rolfe Yeah. So for buy now, pay later providers, they’re not charging the consumer. They’re actually charging retailers a transaction fee for every purchase. So these fees are going to be, like, typically well above the transaction fees that retailers would pay for when their consumer does a credit card purchase. So the average credit card transaction fee that a Canadian retailer pays is somewhere in the range of 1.5% to 3.5% per transaction. And then to give you an idea of how much above that buy now, pay later providers are charging, I was reading, like, Cecil’s fee for retailers is 6.1% plus $0.30 for every transaction. And then PayBright price is like 8.95% per transaction. And then they’ll also charge you, like, 1.95% if your consumer uses a credit card.

Jordan That’s a pretty significant percentage, especially for some retailers or some items that may not have, like, a huge profit margin. Why are retailers involved with this? What’s in it for them?

Kelsey Rolfe Yeah, so it can be like a pretty hefty boost to your revenue even though that is a decent chunk of change that comes off your purchase. But so there was some research from RBC Capital Markets last year and it found that buy now, pay later can increase retail conversions, which is like a fancy term that means sales that wouldn’t have happened otherwise, so increases those by about 20% to 30%. And then beyond that, customers are also going to spend more than they would have. So the average shopping cart increased from 30% to 50% according to RBC and Affirm actually said that its retailers have seen an 85% increase in their average order amount. And then, of course, you can get into like you increase your repeat purchases as well. I also think it’s important to think about how we’re in a period of pretty high inflation and that’s kind of started to pump the brakes on the massive consumer spending that we saw during the pandemic. So I can imagine that if you’re a retailer and you have to raise your prices or you’re just kind of concerned that your customers are going to be doing some belt-tightening, I can imagine that offering them the ability to pay the full amount solely over time might look like an appealing option.

Jordan And I imagine the psychology of this for the consumer is quite simply buying things you wouldn’t buy otherwise because you don’t have the cash on hand, but without the interest, it would make you scared of putting it on a credit card, I guess.

Kelsey Rolfe Yeah, totally. Like, we’ve seen us be really appealing to younger consumers. That FCC study said about most of the users are like between 18 and 44 and what they’re trying to address a lot of the time is what they call a timing gap. So yeah, you know, you’ll have the funds later, but you need to purchase now. Or alternately, some people are using it as like budgeting, essentially. They might not want to take $200 out of their one paycheck, but they can take $50 out of four.

Jordan What do we know, and I realize this is a relatively young technology, but the concept is eternal. What do we know about the risks that this can present, particularly given that you just said it’s a much younger consumer base?

Kelsey Rolfe I mean, when we think about like, increased consumer spending is good for businesses, obviously the flip side is that it might not be great for Canadians themselves. I spoke with personal finance and consumer protection experts and they’re concerned that if consumers see the option to divide their purchase into smaller amounts. It makes them perceive that item is cheaper than it actually is and they might be more open to opening more payment plans or like just having that moment of a sober second thought at the checkout kind of go away and getting caught in a cycle of overspending and accumulating debt. So there was some interesting data on this in the FCC study. Like they said that the vast majority of people in Canada who’ve used by now pay later have paid off their purchases on time, but some of them have had to make some financial trade-offs that are a little dicey. So things like borrowing money from friends and family or taking an overdraft on their bank account or kind of delaying paying another bill and those are things that can have financial consequences down the road. The other thing is, from the actual platform perspective, these plans are interest-free, but you can still be charged a fee if you’re late on a payment or you could also be prevented from using that service in the future. There’s a possibility you could take a hit to your credit score as well.

Jordan Given that you listed several companies when I asked you who the players were. Isn’t there a potential for abuse here and ending up in real trouble for people who might have an online shopping problem and can run up pay later scores with five, six, seven different companies?

Kelsey Rolfe Yeah, it’s definitely a possibility. I think it’s something that like, the FCC seems to be a bit concerned about, that consumer protection experts are concerned about and that we’ve seen regulators in other countries start to try to address.

Jordan So you mentioned that the UK just regulated this space. Is there anything in their regulations that could provide further checks and balances here in Canada?

Kelsey Rolfe Yeah, so what they introduced back in June, so it’s pretty new, is that essentially buy now, pay later providers will have to offer better consumer protection. So it will basically force these providers to ensure that the loans they’re offering can feasibly be paid off by consumers and they don’t mislead potential users in the advertisements around like because they’re saying here’s an easy line of credit or here’s an easy way to buy the thing you want, that it’s not misleading.

Jordan What’s next for this industry as it grows? It’s gone in the last three years from being seen on a few websites to basically, as you mentioned, almost anything you can buy online now you can finance this way. What’s next for the industry?

Kelsey Rolfe I think this is something we are going to see for the long haul. There’s been pretty rapid growth, as we’ve talked about, in interest from consumers and also just from retailers. So I have read in a Salesforce survey that a hefty chunk of online retailers globally, which is like about 40% of respondents, said they want to add this service in the next couple of years. So this is only going to get more ubiquitous and that’s like in addition to about 30% that are already offering buy now, pay later. And Mastercard kind of anticipates that this will make up about a quarter of all online purchases by 2026. So yeah, I guess buying premium beef in installments will not seem like such a novelty pretty soon. And I think a good indication of the potential in this space beyond what we’ve talked about is that this year we’ve seen the tech sector kind of getting pummeled because of rising interest rates. And so Clarna, which used to be actually, I think, Europe’s highest value tech company, it wrote down its valuation in July, but at the same time it announced a huge funding deal and it was backed by the Canada Pension Plan Investment Board. So you still see investors really seeing the underlying value in these companies even when the year has not been kind to the broader tech sector. And one last thing that I’m following is that Bloomberg reported this month a new subset of buy now, pay later companies that are targeting businesses rather than consumers. Basically, they’re just trying to get into like the short-term credit market that tends to be dominated by, I believe, banks and kind of help companies spread out their business payments. It would work very similarly to what is offered to consumers. It would just be a B to B product instead. So that’s something to keep an eye on.

Jordan It would be a restaurant purchasing their premium beef over four payments.

Kelsey Rolfe I think so, yes.

Jordan Last question then, because you talked to financial experts about this and consumer advocates, what should people who have maybe seen this but haven’t tried using it yet and who might be feeling a little short on funds are feeling the pinch of inflation? What do they need to know before they get involved with these companies?

Kelsey Rolfe Actually, I spoke to a person who is used buy now, pay later and I think one thing that she said was really interesting and kind of stuck with me, which is that she suggested you kind of know who you are as a consumer before you get into this and think about whether a payment plan like this would kind of trigger anything unfavourable in you. But beyond that, there are some basic personal finance rules you can follow, which is like, if you don’t think that you can pay off something in a certain amount of like in a reasonable amount of time when personal finance experts have like three paychecks, then you probably shouldn’t buy it. You can obviously just do one payment plan at a time, things like just in moderation, basically.

Jordan Kelsey, thank you so much for this.

Kelsey Rolfe Yeah, thank you for having me.

Jordan Kelsey Rolfe, writing in Canadian Business. That was The Big Story. For more from us, head to thebigstorypodcast.ca. While you are there, please take our audience survey. We would love to hear what you think. I’m not going to stop bugging you about this until I have a few hundred replies, just so I know we’re getting somewhere. You can do it by clicking the button that says survey or you can go to thebigstorypodcast.ca slash you guessed it, survey. Ten lucky winners will receive free Big Story tote bags. You actually can’t buy these. They’re extremely limited edition. I don’t even have one. So fill it out. It’s your chance to win. You can find this podcast wherever you get your favourite podcasts. You can rate us, you can review us, and you could tell a friend. Thanks for listening. I’m Jordan Heath-Rawlings. We’ll talk tomorrow. Back to top of page