Consumers Turn to Unregulated Buy Now, Pay Later Plans

hand holding mobile phone with buy now pay later app open
Contributing Writer

12 minutes

Credit unions focus on advice, better literacy training to help members.

Shopping has changed in recent years as more and more of it has moved online. Now, for many consumers, especially younger ones, the way those purchases are paid for is changing too. One of those changes is the rapid growth of buy now, pay later plans that let shoppers buy in four easy payments with just one click, often with the promise of no interest charges or hidden fees.

This dramatic shift in how billions of dollars of purchase transactions occur has implications both for credit unions that may lose credit card or loan revenue and for their members who may find themselves surprised by interest and account fees, especially if they are unable to make one of their payments.

In Canada, the growth in buy now, pay later plans has been driven by such fintechs as Affirm Canada Holdings Ltd., Sezzle, Klarna Bank AB and Afterpay, which are largely unregulated and have no legal obligation to ensure their customers understand what they are getting into and if they can afford it. In many cases, it’s not clear—even to lawyers who have studied the fine print—whether these plans offer loans or simply a service, as some fintechs insist. That distinction affects whether they are covered by regulations or not.

Not surprisingly, the amount of money involved has attracted the big banks and the credit card companies. Visa now offers an Installments enabled by Visa program that is used by Desjardins, Bank of Montreal and RBC, while Scotiabank has ScotiaSelectPay and CIBC has Pace It. These plans let consumers add installments to the way they pay for items they have already purchased.

Collabria Financial Services Inc., which provides credit card services to many credit unions, is studying the situation. “Currently, we do not offer BNPL as a payment solution,” says Brenda Lyons, head of marketing and communications. “It is something we have on our road map, potentially for 2025, as we were waiting for a product offering that aligns with the values of our credit union partners.”

Call for Regulations

With BNPL, the first installment is made as a down payment at checkout, while the remaining three payments are due in two-week intervals over six weeks, says Consumer Reports. Borrowers use an existing debit or credit card for the initial down payment, which is automatically debited again later for the remaining three payments.

The Financial Consumer Agency of Canada wanted to understand what was going on in this space and asked Option Consummateurs, a Quebec consumer rights group, to examine the plans. In October the group released a report, Buy Now, Pay Later: Assessment of Risks and Remedies, that called on governments to protect consumers by regulating the new financing formulas.

Consumer protection is largely a provincial responsibility, with Ottawa only supervising such federally regulated companies as banks and federal credit unions, but the FCAC does play a role in financial literacy.

"There is a lack of clarity in the application of the law for these companies, particularly in the application of their contract as a credit agreement, due to the diversity of practices regarding fees and the holding of lender’s licenses,” said Clarisse N’Kaa, lawyer at Option Consummateurs and author of the report. “The legal provisions on credit to protect consumers from excessive debt were not all respected."

Clarisse N’Kaa
Option Consummateurs
There is a lack of clarity in the application of the law for these companies, particularly in the application of their contract as a credit agreement, due to the diversity of practices regarding fees and the holding of lender’s licenses.

The BNPL companies have a number of practices that are likely to hit the most vulnerable consumers hard, such as direct and unlimited access to bank accounts for collection purposes; the imposition of insufficient-funds fees by some companies in addition to those charged by banks; loan stacking; and credit file registration, she said.

In addition, the report notes confusion among consumers about whether credit is involved, as well as about the existence of fees or a credit check before obtaining BNPL financing. This confusion stems from the representations made by companies, which may be deemed misleading in certain cases.

The report notes that BNPL products are sometimes presented as a simple payment method, but in other cases they are identified as a credit offering that will show up on a consumer’s credit record.

Consumers Could Face Unexpected Charges

“Unlike traditional forms of financing, the product offered by these companies requires reimbursement by debit directly from the customer’s credit or debit card,” the report says.

Consumers can run into trouble if they are unable to make a payment because the plans are linked to their credit or debit card and they could face NSF and administration fees from the BNPL company and their card issuer.

There are also challenges around resolving disputes if there are problems with a product or returns. Consumers have reported problems reaching anyone at the BNPL fintech to help sort things out.

The question of whether BNPL products are credit or not is not unclear and is one that regulators in Australia, Britian and the United States are studying.

“Unlike regulated lenders, companies offering these products are not required to provide certain information at the pre-contract stage and are exempt from advertising rules on credit or assessment of consumers’ ability to pay or on the settlement of disputes,” the report says.

BNPL products often are presented to shoppers as an alternative to credit that has no fees or interest attached that will help them manage their finances and purchase something that they want now. But the easy access to such programs and the ability to accumulate several plans at once since there are no controls can push consumers into debt.

In the U.S., such card issuers as Capital One have prohibited their users from linking their BNPL accounts to their credit cards “because they believe that BNPL transactions are too risky, not only for customers but also for themselves,” the report says.

In the U.S., the Office of the Comptroller of the Currency recently cautioned banks about:

  • consumers not fully understanding repayment terms.
  • underwriting risk from borrowers who may not have a credit history and are applying for BNPL loans.
  • how third-party relationships could expose banks to operational or compliance risks outside of their control.
  • how limited capture of buy-now, pay-later borrowing activity by credit reporting agencies is.
  • complications tied to returning items or disputing purchases.

In its report, Option Consummateurs recommends that the Canadian federal and provincial governments:

  • clarify the meaning of a credit agreement.
  • clarify the requirement to be licensed in order to grant loans to consumers.
  • enforce existing provisions about representations to consumers to prevent them from being misled.
  • provide funding to promote consumer literacy.

The report calls on fintechs providing BNPL plans to provide consumers with adequate information about the products they offer and their consequences as well as adequate customer service and dispute-resolution services.

No Regulations Planned

At this point, neither Ottawa nor provinces such as Ontario appear to be moving towards regulations.

The Ontario Ministry of Public and Business Service Directory said it is developing regulations for an updated Consumer Protection Act, but they won’t include specific reference to BNPL plans. But the ministry noted that such contracts, called future performance agreements, must be in writing and set out details in clear language. “If a business has represented their goods or services in a false, misleading or deceptive way, the consumer can withdraw from the contract by giving notice to the business within one year of entering the contract,” the ministry said.

“Consumers should carefully review the terms for the ‘Buy Now Pay Later’ plan to ensure that they understand what the true cost of the goods or service will be at the end of the contract,” it said. “They should also ensure that they understand what actions the agreement allows the business to take if they are late or default in payments.”

A spokesperson for the Financial Services Regulatory Authority, which regulates Ontario credit unions, said: “While FSRA does not have any specific guidance in place or planned for ‘Buy Now Pay Later’ programs, credit unions are expected to have board-approved policies in place outlining their lending programs and implement the appropriate risk management processes.”

Last June, Max Levchin, co-founder/CEO of San Francisco-based Affirm, told The Logic that he wasn’t opposed to regulation. “I don’t think we need to regulate BNPL out of existence, but a cap would be nice. Like we can’t make more than X dollars or X percent of the margin.”

Max Levchin
I don’t think we need to regulate BNPL out of existence, but a cap would be nice. Like we can’t make more than X dollars or X percent of the margin.

Peter Routledge, superintendent of the Office of the Superintendent of Financial Institutions has warned about the expansion of unregulated credit. “One example is the rise of buy now, pay later providers, which provide, in my opinion, the equivalent of consumer credit for purchases of consumer durables and other items,” he says. “Rapid expansion of this form of consumer credit has been accompanied by credit loss rates well above those to which we have become accustomed in Canada. Rapid build-up of these balances, if large enough, could disrupt a segment of household finance.”

An FCAC study found the most common reasons for having used a BNPL service were “to help me budget” at 42%; “I couldn’t afford the entire purchase right away” at 39%; and “to avoid interest and fees” at 23%.

A common motivation for using the service was that it made payments more manageable and sometimes helped bridge a “timing gap” where a sudden need or opportunity arose and the user did not have the funds available at the time.

Changing Behavior

Research by the British consulting agency Behavioural Insights Team suggests the expansion of buy now, pay later is changing consumers’ behavior. “Nearly nine in 10 people suggested that their shopping habits had changed since they started using BNPL: 50% had bought something they would otherwise have to save for; 44% had checked that BNPL was available when shopping; and 38% had spent more than they planned because BNPL was available. This suggests that consumers may be less likely to build up a savings buffer when using BNPL.”

A third of those surveyed said they had run into problems using BNPL, either by missing a payment, being charged a late fee or falling behind on other payments.

A study by Payments Canada says merchants generate greater sales revenue by offering BNPL because customers are more likely to make a purchase, spend more money per visit and to shop more often. 

BNPL providers earn their revenue mainly from the fees they charge the merchants. Additional revenue comes from late fees or penalties charged to consumers who do not fulfill the repayment terms, while some providers do charge interest fees.

For example, Wayne Pommen, chief revenue officer at Affirm, told BNN his company has an algorithm that decides within seconds of a shopper clicking their button whether they qualify and whether they should be offered zero interest or charged higher rates.

“Some of our plans are interest-free, depending on what the merchant wants to do, and some have an interest rate, but what we never have as a firm is late fees,” Pommen said. “We don’t have compounding interest or revolving interest like a credit card.”

He said the technology limits Affirm’s risk since each purchase is underwritten separately “so we’re not giving consumers an open line of credit and hoping that it goes well.”

Credit unions in the U.S. are moving into the BNPL space slowly, if at all. A survey by PYMNTS and PSCU, a CUESolutions provider, found that 39% of credit unions did not plan to offer installment payment options, and even the 41% that said they do plan to do so will not roll out the product in the next year.

Focus on Coaching

The issue of values is key for many credit unions, since the goal of BNPL providers is to make it quick, easy and painless for customers to purchase items, while many credit unions stress their financial coaching and literacy efforts that encourage members to carefully budget and stop and consider any purchase to make sure it fits with their plan.

“We really pride ourselves on coaching, and we always go through the pros and cons of buy now, pay later, because there are pros and cons,” says LeeAnn DeWys, personal lending coach at $5.8 billion Libro Credit Union, London, Ontario.

She says Libro coaches won’t push owners either way, but they will ask tough questions to help them understand their options. “We’ll ask: What does your budget look like? Have you allotted this money? How comfortable are you if you missed a payment?”

DeWys says Libro’s coaches are always reaching out to owners ahead of major events like a mortgage coming due and urging them to review their situations. “Let’s take a look at your payments. Let’s take a look at your budget. Those are the questions that we want to ask.  We never want our owners to feel like they’re lost. We want to make sure that they know that we’re here to support and help them.”

LeeAnn DeWys
Personal Lending Coach
Libro Credit Union
asset size — $5.8 billion
We really pride ourselves on coaching and we always go through the pros and cons of buy now, pay later, because there are pros and cons.

CUES member Archie Bonifacio, chief community officer at $2.5 billion Your Neighbourhood Credit Union, Kitchener, Ontario, is also cautious about BNPL plans. “I think these sorts of programs look great on the surface, but you have to really inquire about the rules and regulations around them. I think in general what they potentially can do is create bad habits for consumers,” he says.

“That’s why we like to lean more on the financial literacy aspect and the advice aspect to ensure that when you’re purchasing something that you need that it’s definitely something you need but also that you can afford it.”

He says the challenge is to help members consider “the balance between, am I buying it because I need it or am I buying it because I want it? Is this something I really should be buying now, or should I go back to what we traditionally did before credit was even available and just save for it?”

“We want to stay very focused on that advice, ensuring that you have the right habits in place,” Bonifacio says. “I don’t think we want to make it too easy for people to purchase things that they can’t afford, and that’s what could potentially happen.”

Bonifacio says he likes to remind members of a quote by budgeting expert Dave Ramsey in his book The Total Money Makeover: A Proven Plan for Financial Fitness: “We buy things we don’t need with money we don’t have to impress people we don’t like.” cues icon

Art Chamberlain is a freelance reporter who focuses on the credit union system.

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