The Decibel - What you need to know about Buy Now, Pay Later

Episode Date: October 17, 2022

If you’ve bought something online recently, you’ve probably seen a payment option to spread out the purchase in installments. This is known as Buy Now, Pay Later and it’s popping up all over Canada with companies like Amazon, Adidas, Samsung and Sleep Country. But why is it all over the place all of a sudden?Finance reporter and columnist Tim Kiladze looked into it, and he explains where it came from, how it affects credit, and how it encourages people to spend more money.Questions? Comments? Ideas? Email us at [e-mail]

Hi, I'm Mainika Raman-Welms, and you're listening to The Decibel, from The Globe and Mail. If you've made any online purchases recently, you might have seen a little line underneath your total at the checkout. Click here to pay in four installments. This is known as Buy now, pay later. It's popping up everywhere these days, with companies like Amazon, Samsung, and Sleep Country. And some studies show it makes people spend more money. And so the real fear, and I'll say this personally, my fear is that it can lead to like massive amounts of debt being accumulated because you think that, you know, it's a hundred bucks here, a few hundred bucks there, but all of a sudden it's

like a few thousand dollars that can get added up. Finance reporter and columnist Tim Kalatz is here to tell us more. This is The Decibel. Tim, thanks so much for joining me again. Happy to be here. So I think the general idea of buy now, pay later is pretty self-explanatory. You buy it now, you pay for it later. But how does it actually work? So there's a few different models, but in the simplest version,

you buy something and you get to spread out the cost in four payments. So you spend $100, you put $25 upfront, and then 25 more each over four periods. It tends to be bi-weekly. So every two weeks you pay the rest and it's marketed and it truly is kind of interest-free. There's no cost to you if you make your payments on time. So it can just be a nice way of spacing out your purchases. However, if you miss a payment, depending on the service that you've used, that's when fees can come in. Okay.

So I'll give you one good example. So Flexity, which is actually a Canadian company that got purchased last year. And so it's if you want to buy a fridge, you know, your fridge breaks and you need a new fridge, but you don't have the money right now, you can go to the brick or wherever and get to a program with Flexity. And it'll be like no money down for 24 months. And then you start paying. With them specifically, though, I looked into this last night, they have a program with Alexanian, which is a carpet company here in the GTA. If you miss a payment, you are then subject to their interest rate is basically 30 to 38%, which is much higher than a credit card. A credit card

tends to be 20%. So it looks great, but the problem or the cost of messing up is very high. And over time, so let's say like this is a $100 purchase. You split it into four payments. Seems like it would be $25 each. Is it actually $25 though? Or are you actually paying like, you know, $26.50 or something per payment? Like do you end up paying more if you spread it out? In theory, no.

Like it's really, it is meant to be pretty straightforward. And an important part of this that I think people don't really know because it's on the backside of it is a lot of the firms that are clean, so to speak. So they really don't charge you any fees. It's like if you make your four payments on time, you're just good to go. They make money by charging the retailer or the merchant fees. And so the pitch to merchants has been, you know, if you sign up with us, whether you're Afterpay or a firm or Klarna, these are some of their company names, the buy now, pay later names, consumers like using

us. They like the idea of being able to spread the payments out. But the cost of that is you pay us, the buy now, pay later firm, roughly two to 8% of the cost, basically the cost of the purchase. And so they make money from the retailer itself.'s in it for retailers though like why would they pay for this this by now pay later service there have been some studies that show that consumers may spend say 30 percent more they'll just add more to their shopping cart online because you know even though the total cost might be say a hundred dollars once you kind of hit that button and you see, oh, well, it's only $25 right now, you might add more to the cart because it's less of a daunting price. How popular are the buy now, pay later services in Canada today? Like, do we

actually know? On the outside, you know, the average person doesn't know. I'm sure, obviously, the retailers know how much is being spent to these platforms, but it's been really hard to get information. You will see reports come out about how, you know, by 2030, the potential for this is $500 billion or whatever some crazy number is. But it's been really tricky to know exactly how much is being used right now. Canada for sure has been a laggard relative to other countries, particularly like the U.S. And that's partly a function of our culture here. You know, we're a bit slower to adopt new technologies. So an example I would give is, you know, in the US,

you might hear about Venmo, which is a way to like transfer money between friends. Venmo didn't really take off here because we have Interac and everybody uses the Interac system. It's very cheap, you know, it's an e-transfer. It's something we've known for a long time. The stat that I find is the most helpful, and it's a US one, is on Black Friday in the US last year, the stat I found was that 8.2% of consumers who were shopping online used a buy now, pay later service, which is still pretty low relative to the hype these things have have gotten but it was up from about four percent

in 2020 so there's growth um but there's been so much hype around this being the future and one of the big things is that apple now has come out and said it's going to launch its own buy now pay later program so that has everybody like one uh optimistic about how this thing could kind of become the norm but two for a lot of the existing companies they're like well if apple just integrates this into their own like apple wallet or whatever on your iphone there's no need to go to an outside service so it could do a lot of damage to the existing players okay let's let's just get the lay of the land i guess in the canadian market then tim so you mentioned apple's got a service starting you mentioned flexity

clarna what services are actually out there for Canadians right now? There's a lot. And it's really hard to keep track of them, to be honest. It's more like it's the norm now versus the exception or whatever the phrase is. And therefore, it's pretty much every site, if you're shopping online, will have a version of this. And one thing I really want to stress is that a lot of what they're offering isn't new like buy now pay later has existed for years you know i remember going shopping with like with my mom at sears when i was like eight years old

or whatever and like they would always always ask you you know around christmas time do you want to purchase this on layaway and it just meant you just pay for it over time. But it was a very clunky process. These firms are just trying to kind of digitize the process. And so it's not that new. The concept is not that new. The concept is not that new. I guess the way that people are interacting with it seems to be because now we're shopping online

and so there's the option there. And another difference now is it's being used for smaller purchases whereas before i keep using the fridge example just because that's a very tangible thing that you can you can understand now like you can it's on like lululemon sites you want to buy like a new sweater or like yoga pants or whatever you can do it you can you can do with small items and like it's on fast retailers like sheen and zara and and then it kind of raises the question of like, should you be really paying for, you know,

a $50 purchase in four installments? Like if you can't afford the $50 purchase, like should you really be doing it? It's different if you are buying that item like a washing machine that broke and you just don't have the money. Like that's a very different situation from buying some like new clothes that you might return half of them anyway.

We'll be right back. So why are these suddenly so popular now? It kind of mystifies me, to be honest. So it was kind of like this gradual multi-decade move away from the sector and then it was like bam it all came back and um i think it's just part of the digital economy you know it kind of came back in in this new form and it's like now it's at the point of checkout online and it's just very simple to do. You know, it's like literally you click a button and enter some information, but you can do it in like two minutes. Whereas before it used to be like you're at the retail counter and they often had to call their credit department. You had to fill out a long form by hand on paper.

And so it was like 20 minutes and now it's two. I've got to wonder about inflation, something that we keep talking about on the show because it's really kind of been part of the zeitgeist these days. How does inflation affect how much people are using these services or might use these buy now, pay later services? From the demand side, there's two and it becomes $110, $120. That might make it more enticing to like spread that payment out over four installments because it's just easier to digest. You may not have enough money saved

or whatever the case may be. But the flip side can also be true, which is that if things just start becoming too expensive, people just start shopping less. And, you know, if a recession hits, people lose their jobs. There's just less what you would say in economics, aggregate demand. You know, there's just less demand in the market for goods. the back end for these buy now pay later firms, a lot of them, they might borrow money or they get money from investors that they kind of dole out. But at the end of the day, like they borrow.

And then they, that thinking is that they borrow and they lend that money out at a higher rate. So I was saying with Flexity before, if it's around 30%, you know, there's a huge margin or spread in there where they can make money. If people miss payments, then they're making money. Exactly. The problem now though, is that just like with mortgage rates, just like with interest rates in general, all rates are going up. So the rate at which they borrow money is rising. So therefore that compresses their margin, their spread, and it just makes a business model a lot tougher. These firms really got a jolt of, I don't know, adrenaline, whatever you want to call it,

by the pandemic. Because yes, e-commerce sales boomed and it felt like this was the future and everything was going to be online. What we're seeing now is that actually e-commerce sales not only kind of hit their ceiling for now, but they're actually starting to fall again. So that's hit everybody. It's not just these buy now, pay later firms. Amazon's been affected. Shopify has been affected. That's why their stocks have taken hits.

And it's really kind of sent this chill across the sector because, you know, some numbers here are, so Square, which is now called Block, but they're kind of a payments company. They bought Afterpay, which is another one of the big buy now pay later firms for $29 million US last year. The acquiring company is now down 75% since. A firm, one of the buy now pay later's, their stock there, they actually trade on their own

is down 89% from its peak last year. So like this huge bubble has popped. And most of these firms, I would say almost all of them really don't make money. They don't make money. They don't make money. And so that's why if I sound too skeptical, I'm not trying to be like, I think it's a real legitimate business, but there was just way too much hype built around it. So these companies are essentially loaning you money. It sounds like you're not actually getting like a credit score check or anything when this happens.

Is that right? For the most part, yes. You know, when you go through the process, they do like a quick credit score check. And for people who don't know this, you know, if you actually do a full credit check, if you're somewhere and like they require a full credit check, it can actually dent your credit score. Yeah. So these firms, a lot of these firms have said, no, no, no, we don't do full checks. And it's true. They do like a quick one. And so kind of using your information you have to enter, they can do a really quick check to see if there's any kind of major red flags out there in the market.

But, but that's a really important point though, because we talked about like, yes, if you miss a payment, there's high interest rates that you're then paying back. But missing that payment could actually dent your credit score, too. That could be a big consequence. Totally. And at the end of the day, it is a version of a credit card. And these firms really do not like that image out there. They're really out there trying to say like, we're making it easier for people to spend or whatever. Like it's all

seems very simplistic, but it's a credit agreement. And if you, if you like, if you never pay the money back, like they're going to ding you, you know, like it's not, it's not just this mystical thing where it's like, oh, the money just disappeared and whatever, you know? And it's even more relevant for the big, like the big tickets, like they will really come at you and that can, that can hurt your credit score. Is there any regulation around these kinds of services? In general? Yes. Like they are effectively, like I was saying, they're effectively like credit cards. So there are rules that apply to them, but it is not heavily monitored in the way that they're marketed, for instance. And so Canada has actually been a bit slower, I would argue.

But that's also because the rate of adoption here has been a lot slower in terms of just general usage relative to, say, the US. But the UK, for one, has come out and they've been quite, they've done some pretty good studies for them, the actual kind of regulatory side of things. And they found that most people like, for instance, don't understand how the program works. And they don't actually know that there are fees if you miss payments. And I will say, you know, again, myself, I was trying to look up last night, some of the fees to see if it's more kind of clear now and it's not so someone who's even financially literate like me like i you know i cover finance it is not clear you kind of have to dig into like the credit agreement so to speak when i was talking about some of the high rates like 30 rates that people charge like it was

literally a footnote at the bottom in tiny print that i found online okay yeah. Yeah. I mean, this, honestly, this sounds like it could get really complicated. There's a lot of different moving parts here and a lot of different services to keep track of too. Like, can you, I wonder, can you borrow from, could you be borrowing from two things at the same time? Is that, is that even a possibility? Yeah. And you can have multiple credit cards at the same time. So yes, it could become quite a problem. And so the real fear, and I'll say this personally, my fear is that it can lead to like massive amounts of debt being accumulated because you think that, you know, it's a hundred bucks here, a few hundred bucks there, but all of a sudden it's like a few thousand dollars that can get added up. And then if you're not paying it,

you're paying interest on that, et cetera. So it's at the end of the day, it's just classic financial, classic financial system. Um, and they're marketing it as if it's different. Yeah. I guess the question that I'm, that I'm left with here is, is, is this something that's going to be sticking around or is, or is this maybe kind of a fleeting fad that, that, that might not last that long? My gut tells me it's for sure sticking around or is this maybe kind of a fleeting fad that that that might not last that long my gut tells me it's for sure sticking around particularly with the likes of apple getting into it i do think though that it's going to be more of a niche type product or it'll serve like a sizable part of the market say 10 20 but not everybody will will need. And I think there's gonna be a lot of people

who get dinged by it in a sense of like they were burned, I would say, because they miss payments and they don't even mean to miss payments. They just like lose track or whatever, you know? And then they're gonna realize like, what, there was a cost to that? I didn't know that. So there's gonna be some learning woes or whatever you want to

call it. And one thing I would say is if you go back about a decade, eight years ago, there was this huge push, they're called fintechs, and, you know, financial technology firms. And the idea was like, they were going to take over the banks, they were going to disrupt the sector. And they were going to like, take down the dominant players. And none of it happened because what ended up playing out was that the banks got quite worried. And they just it forced the banks to be more competitive and kind of launch similar offerings. And you're already seeing that, right? You know, RBC, Scotia, et cetera. They're launching versions of buy now, pay later.

But that being said, I think it's it's real. You know, it's not some silly thing. Layaway has existed for decades. And so therefore, there'll always be a part of the market that wants it. So what advice would you actually give people who are going to be using this service, this buy now, pay later service? Number one, it is not free money. There are some services that want to make it as clean as possible. So if you make all your payments, you're good to go. But it is a form of credit. At the end of the day, if you are not paying everything up front, they are effectively loaning you money until you pay

it back. And no one's going to loan money for free. That is as simple as it gets. The other thing I would say is that it's probably going to get quite easy to lose track of what you're spending and where. Because you can spend 50 bucks here and 75 bucks there, maybe on different platforms. It is really easy to lose track. And that's not just like a fear I have. That's what the likes of kind of the uk regulators have found in their initial kind of surveys of the market um so you kind of have to be a bit vigilant um the whole

digital e-commerce model is designed to make it as easy as possible for you to spend money and on one hand it's nice like there's no friction as they say like it's it is really nice i have young kids like i want to buy diapers it's just really nice to literally click one button and like the the order's gone through um but it's a lot different when it's just frivolous goods that yeah maybe you didn't need tim thank you so much for taking the time to walk through this today happy to be here. That's it for today. I'm Mainika Raman-Wilms.

Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Kasia Mihailovic is our senior producer, and Angela Pichenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.