CyberDebt Monday: Are new "Buy Now, Pay Later" options a blessing or a curse?

Before you do any Cyber Monday shopping, read this.

In the endless tsunami of problems that Canada is currently facing, and with a tired federal government that doesn't have the chops to deal with problems that have obvious solutions, what keeps me up at night are potential problems that could be festering below the surface of active public scrutiny.

Cyber Monday is the perfect day to highlight one particular example: the burgeoning "Buy Now, Pay Later" industry, or BNPL.

Many Canadians who don't have cash or room on their credit cards are about to go Cyber Monday shopping anyway, thanks to the mushroom-cloud-like growth of this industry. Think popular firms like Afterpay, Affirm, and Klarna, which offer "pay in installment" options in partnership with a growing number of retailers, including Walmart, Amazon, and fast-fashion behemoth Shein.

The BNPL industry has really exploded. The global BNPL market, which emerged as fintech innovation grew but particularly took off as prices rose during Canada's inflationary crisis, was valued in the neighbourhood of USD 30 billion in 2023. BNPL transactions accounted for a whopping $316 billion in global spending last year alone.

While some have hailed BNPL as a financial lifeline, concerns are being raised about the lack of consumer safeguards and problematic economic signals that the industry's explosive growth portends.

So, is BNPL a godsend for cash-strapped consumers or a major problem looming on the economic horizon?

Understanding what BNPL is and how it works is essential to answer that question.

For consumers, BNPL firms offer a product that can sound a lot like layaway plans of days gone by. But unlike traditional layaway models, with BNPL and a small deposit, a customer can get their items right away instead of waiting until they are paid off. And, BNPL 2.0 offer financing for everyday products like clothing and cosmetics, not just for significant purchases like durable appliances. And while there are big differences in service offerings between companies, these installment plans are often offered at little or no interest unless a payment is missed.

Applying for and receiving access to BNPL services can also be significantly more accessible to consumers than traditional credit models. BNPL providers don't necessarily perform "hard" credit checks that may affect a consumer's credit score. Instead, they may perform a soft credit check to assess creditworthiness. With a mobile number, legal name, email address, date of birth, and the last four digits of a Social Security number, many people will be deemed eligible to access BNPL services.

From there, it's easy to utilize BNPL - particularly after loading a virtual cart at any participating online retailer.

For retailers, BNPL firms also offer a lucrative proposition. While a primary source of revenue to BNPL companies are the fees they charge retailers to provide their services, offering consumers a "pay in installment" option at checkout may convert browsing into sales at a substantially higher rate than without. BNPL checkout transactions are also straightforward for the consumer to manage, which removes another traditional barrier to closing a sale for retailers. This is partially why BNPL platforms are viral among Gen Z, a generation drawn to their ease of use, lack of upfront credit checks, and absence of traditional credit card fees. In that, BNPL has given a new generation of consumers a new, potent form of purchasing power. Said differently, BNPL has been proven to boost retail sales in a major way.

So, is there a problem?

There are signs of trouble, but Canada's federal Liberal government has made it hard to evaluate them. Here's why.

For starters, there are big questions about the adequacy of consumer safeguards for those using BNPL products. While many BNPL plans are advertised as interest-free, some longer-term options—or the penalties for missed payments—are accompanied by high interest rates and fees. BNPL loans aren't necessarily tallied onto an easy-to-read statement, particularly if a consumer uses multiple services. In those cases, its easy for people to overextend their budget.

BNPL loans or payments - missed or otherwise - may or may not be reported to credit bureaus, depending on the circumstances and company, raising questions about whether capacity for carrying more debt is being accurately assessed. This fact belies the lack of independent resources for consumers of BNPL products in Canada. While the Financial Consumer Agency of Canada undertook a brief study of the industry three years ago, little seems to have been done since. Today, the Agency - which has a mandate to protect financial consumers - only offers a meagre website on BNPL to educate consumers with virtually no recourse, despite the industry's growth. And in Canada, the industry isn't cohesively regulated, either. Instead, it is subject to a patchwork of existing laws across jurisdictions with emerging debate about applicability.

Then there's the issue of what - especially asset-poor, cash-strapped Gen Z consumers - are using BNPL to buy. While BNPL was initially targeted at big-ticket items like electronics or travel, recent data suggests consumers are increasingly using it for everyday purchases, including clothing, beauty products, and even takeout meals. Further to this point, expert testimony at a Parliamentary committee last month - the first time BNPL came up in Parliament - raised concerns that no material restrictions could prevent BNPL from being applied to groceries in Canada. Even the most cursory Google search yields Reddit threads dedicated to overcoming what barriers do exist in paying for consumable grocery products with BNPL loans.

This trend could suggest evidence of several problems, including understating or hiding exactly how much stress inflation has put on Canadian consumers, particularly those aged 35 and younger. In the same vein, BNPL trends could beg questions about the true strength of the retail market. At the very least, they should raise alarm bells about why younger Canadians, who can't afford standard markers of consumer status like homes and cars, are choosing to show social status by blowing big sums of cash on clothes and travel purchased via BNPL.

The term "affordable affluence" is growing in popularity on social media platforms like Tiktok. Some commentary is interpreting this to mean that influencer culture is colliding with a growing sense of disillusionment among under-35s to create a consumer culture where people prioritize buying higher-end retail items over saving for a home, or starting a family because either of those goals now seems out of reach. Said differently, young Canadians have seen what the housing market looks like, know how much groceries cost, and have said, "Fudge it, I'm gonna buy that mass-produced dupe designer sweater instead." And, of course, it's been suggested that BNPL is one of the primary enablers of this trend.

However, the newness and explosive growth of the BNPL industry means limited publicly available data exists to evaluate any of these concerns. It's difficult for legislators like me to accurately assess the existence, risk, and impact of a BNPL "bubble." Suppose unemployment rises or the economy contracts further. In that case, it is unclear if the federal government could see the impact of widespread defaults on BNPL debts on the economy. And, it's difficult to assess whether or not young people have financially written off buying a home by accumulating large amounts of underreported BNPL liabilities.

On the flip side, it’s also difficult to assess the veracity of claims made by BNPL companies that their products have actually lowered consumer debt by providing an alternative to high interest credit cards.

The point I'm really making is that there are more problems with the federal Liberal government being listless and weak than even the big-ticket issues that make the mainstream media cycle. All the potential problems I've listed in this piece are the exact type of issues that a strong, focused and functional federal government should have been actively monitoring at senior political levels and publicly addressing. And yet, here we are.

Canadians need an election and a new Conservative government capable of implementing a clear path out of the inflation and housing crises, not a cart full of Shien made possible by the miracle of BNPL and a lack of oversight.

Happy Cyber Monday. May you spend more wisely than the federal Liberals.