Apple announced on Monday it would offer BNPL financing through Apple Pay
When Jameil Joseph goes to check out his online shopping cart, he'll often click on the option to buy now and pay later.
Most of his friends do it, too, he said.
"I use them whenever they're available," said Joseph. "It's always better to have extra money."
Increasingly, online retailers are partnering with financial service providers to allow customers to make purchases — while only paying a fraction of the cost upfront.
According to analysis conducted by SIA Partners, the buy now, pay later (BNPL) share of retail e-commerce was less than two per cent in 2021, but is expected to double to four per cent by 2025.
Apple is the latest company to enter the market, announcing on Monday that it will offer financing options for purchases made via Apple Pay. The new service, Apple Pay Later, will be available in the U.S. in the fall. (Apple has not disclosed when the service can be expected to be available in Canada.)
BNPL — offered by providers like Afterpay, Klarna, PayBright and Sezzle — is essentially like a point-of-sale loan, where a customer purchases an item, then pays for it through regular instalments over the course of a few weeks or months.
But such services are also catching the attention of financial regulators around the world, as the industry currently has few regulations.
These schemes aren't exactly new — car dealerships and furniture stores have commonly offered no-interest financing options for years. But BNPL loans are becoming more mainstream and better integrated with online shopping platforms, giving consumers the chance to finance nearly any kind of purchase with the click of a button.
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PayBright, for example, which offers BNPL services in Canada, partners with more than 5,700 retailers — including The Bay, Steven Madden and Apple — to offer six-week interest-free instalment plans. According to their website, they've approved more than $1.76 billion in consumer credit since their inception in 2009.
These buy-now-pay-later schemes have found particular success with young consumers, allowing them to access these loans with very few barriers.
At the same time, the rising popularity of these services is raising concern about the impact they have on consumer debt.
Joseph, a 30-year-old who lives in Toronto, says he has a good handle on his finances. At the same time, he concedes that these services can encourage people to spend more.
"Sometimes, you know you want to buy something; instead of waiting, you can buy now," he said.
Young people attracted to easy-to-get loans
It's a message that's playing out on social media platforms like TikTok, where influencers are partnering with BNPL companies to market these services with skits, songs and dances.
"You get a little bit of instant gratification, because you may see a luxury brand purse, or a luxury brand phone, or something that may be just a little bit beyond what you can afford on a day-to-day basis," said Abhishek Sinha, a partner at the consulting firm Ernst & Young.
"But you still are able to actually acquire that good or service, and pay for it over a period of time."
The growing popularity of BNPL prompted the Financial Consumer Agency of Canada to conduct a pilot study last year on the use of these services. While the findings were not statistically significant due to the small number of people surveyed, the study found that of those surveyed, young consumers between the ages of 18 and 34 use online BNPL services the most.
The top reasons why consumers turned to these services were budgeting, inability to pay the full price of a good or service, and to avoid interest and fees.
Julia Drybrough, from Winnipeg, says she likes using BNPL services because they make purchases more "palatable."
"I buy items that i consider 'treat myself purchases,'" said the 24-year-old, who works in the service industry. "Things like makeup, shoes and clothes that I couldn't justify due to the reduced hours I was working because of the pandemic."
Safwan Zaheer, an associate partner at SIA Partners, a management consulting firm, said BNPL is more appealing than credit cards for some consumers.
"Buy now, pay later is a better form of credit as compared to a credit card, which has common hidden fees and compounding interest and penalties," Zaheer said.
But personal finance expert Mark Ting doesn't recommend consumers turn to BNPL services, saying they can encourage young consumers with little financial literacy to overspend.
"You can fall into the trap of just buying a whole bunch of stuff, overspending, thinking that these low monthly costs are reasonable," said Ting. "And then all of a sudden, you've got a whole bunch of them."
Is “buy now and pay later” really interest and fee-free? Mark Ting is here to discuss how this method of payment differs from other payment options such as using a credit card or paying with cash.
BNPL companies will often run a soft credit check on a customer before issuing a loan. However, a source of concern for critics is that, in contrast to credit cards, the issuance of BNPL loans is not reported to credit bureaus.
"You could have multiple loans all over the place and they'll never talk to each other," said Ting.
In an email, Equifax said they are currently in discussions with BNPL providers in Canada about the potential of reporting accounts to them.
A win for retailers
Although business models differ from one company to another, most BNPL companies make their money by charging retailers for purchases made through their services.
According to Swedish fintech company Klarna, a major global player in the BNPL space, consumers spend 45 per cent more when they use buy now, pay later. And about the same percentage of people will make a purchase using BNPL that they otherwise would have delayed, making these services a win for retailers.
"BNPL increases orders and leads to fewer dumped carts," Klarna says on its website.
That essentially means retailers are turning browsers into customers, said Sinha.
"They can offer their goods and services to a demographic which can't really afford it right now. So it opens up a bigger market for them than otherwise," Sinha said.
Growing industry, with challenges
Apple's entry into the BNPL space is part of the company's fintech strategy of tying its products to financial services, said Zaheer. With increased adoption of BNPL services, Apple sees an opportunity to increase its volume of sales through Apple Pay.
The company said it would provide the option to make purchases in four equal instalments over six weeks, with no interest or fees charged.
As more players enter the BNPL game, there are also concerns about profitability.
Klarna recently laid off 10 per cent of its employees and saw its valuation drop by a third, according to Bloomberg. At the same time, Klarna has expanded to Canada, with a new office in Toronto meant to be its North American headquarters.
What's playing out with Klarna is emblematic of challenges in the industry, said Zaheer, because of how much capital is needed to operate BNPL, along with no interest being charged.
"It is a broader concern in the industry that buy now, pay later firms … are broadly non-profitable," Zaheer said.
BNPL providers are also facing higher interest rates, raising their costs and lowering margins.
Another uncertainty facing the industry is regulation. The U.S. Consumer Financial Protection Bureau (CFPB) launched an inquiry last December into BNPL, ordering five major companies to release information about their practices in a bid to learn more about their operations.
"The CFPB is concerned about accumulating debt, regulatory arbitrage and data harvesting in a consumer-credit market already quickly changing with technology," it said in a news release.
Looking into the future, Sinha said regulation in Canada is likely on the way as these services become more popular.
And given consumers' propensity to incur debt, Sinha said he also expects BNPL services to continue to grow.
"Consumers thrive on credit."
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