Less than a decade ago, if you wanted to buy something, you had to pay for it upfront. If you didn’t have that money (or a credit card), you couldn’t buy it. Even credit card companies would restrict you to a specified limit, and it would be a struggle to purchase a big-ticket item beyond your credit limit. The last 10 years has seen a ton of innovation in the fintech space. One product that has become increasingly popular during this time is ‘Buy Now, Pay Later’ or BNPL.
What is BNPL & how does it work?
BNPL is a type of credit where a customer can buy a product now and pay for it in installments over time. BNPL programs may also offer you a way to make larger purchases that are greater than your credit card limit. Readers should note that The Buy Now Pay Later program is not a form of credit card financing, but it can get you access to credit for larger purchases than you could otherwise make.
This program is very simple and conceptually similar to any other loan you would get from a bank. First, you select the product you want to buy and the program you want to use. Next, you pay a non-refundable down payment on the product. This down payment is applied to the total cost of the purchase. Monthly payments are then made over a set period (that usually ranges from 6 weeks to 24 months) until you have repaid the outstanding balance.
Depending on the lender, these loans can be made available with or without interest or any other associated fees. The loans are often marketed to people who are short on capital to buy a product in one lump sum but can afford to pay it over time. In the past, consumers could only get ‘buy now, pay later’ with a credit card, but now several retailers offer the service. Moreover, the interest rate is much lower if you compare it to personal loans, and the process of getting access to this credit is relatively seamless.
Online and offline retail stores often offer financing with zero interest options for a given period to entice consumers to buy their products and boost demand. However, they may charge late fees to consumers when payments are not made on time. For those waiting for their next payday or individuals crunched for cash, the charm of monthly payments without interest can be too hard to overlook.
Will using a BNPL service impact my credit score?
Depending on the lender, the loan amount, and the loan tenure, a hard or soft credit check may be required. As long as you make payments on time, BNPL plans can help you build a good credit history. But if you default on your payment, it can hurt your credit score. A few lenders in the market do not perform a credit check and work on a repayment plan with the customer in case of failed payments.
The growth outlook for the BNPL market in Canada
The BNPL market in Canada is segmented based on product type (digital goods, physical goods & services), distribution channel (online v/a offline), and end-users (consumers v/s B2B). Although this article focuses on BNPL in the consumer space, several companies offer installment payment products to businesses.
B2B Businesses accepting a BNPL transaction have nothing to lose. They can use their available funds to buy the goods/services they need to remain in business or spend that extra cash in hand on a host of in-store and online upgrades – both consumer-facing and internal. The wish list is practically limitless.
The BNPL industry is expected to grow at an enviable pace in the next few years. According to a study by research and markets the gross merchandise value or the amount spent on BNPL platforms in Canada was pegged at US$2.55 billion in 2020 and is forecast to touch US$3.6 billion this year. It is then estimated to reach US$9.44 billion by 2028 (indicating a compound annual growth rate of 14.7% from 2021-2028).
Several factors fuel this growth including:
a. Increased eCommerce penetration during the pandemic
b. Growing preference for cashless payment options that was accelerated during the pandemic
c. The rise in demand for flexible payment options and growing disposable income of consumers
d. Increased demand for online shopping and attractive discount policies offered by retailers.
e. The growing number of merchants that are offering credit facilities to their customers
Who are the big players in the BNPL space in Canada?
Canada has experienced tremendous growth in the BNPL space over the last five years. As the market has grown, so has the complexity of offerings. A few years ago, BNPL solutions were straightforward, offering consumers a great way to buy now and pay later.
In 2021, BNPL solutions have become very sophisticated and offer consumers various options to choose from. From a retailer or merchant’s standpoint, getting access to a BNPL payment method has become very convenient.
Several companies have an off-the-shelf product catering to offline point of sale channels as well as online channels. In addition, all popular e-commerce platforms, including Shopify, Lightspeed, Magento, WooCommerce, Salesforce, etc., have integrations with a BNPL service.
Now, let’s look at some of the big players in this market.
PayBright was founded in 2013 in Canada to provide installment payments to merchants and their customers at checkout. PayBright is one of Canada’s leading providers of installment payment plans for e-commerce and in-store purchases.
It has built an extensive network of domestic and international merchants that allow users in Canada to shop at more than 7000 outlets. Apart from partnering with big names like Hudson Bay, SHEIN, Wayfair, Steve Madden & eBay, Paybright has thousands of local retail outlets offering BNPL. Typically, their payment plans include four bi-weekly and interest-free payments, but they also offer easy monthly installments for up to sixty months for larger purchases. Affirm, a U.S based company and a global leader in this space acquired PayBright in 2020 for CAD 340 million.
AfterPay is an Australian-based installment payment service that has expanded to the United States, Canada, and the United Kingdom. It allows shoppers to purchase goods online, then pay them off in monthly installments. Afterpay’s payment plans do not include any interest and additional fees, and consumers only pay for the product’s price. It also does not require any credit checks or for consumers to provide their social security numbers. So how do they make money? They get paid a flat fee per transaction by the retailer. According to Afterpay, retailers pay 2.9% per transaction, though rates vary by industry and volume of transactions. While Afterpay currently partners with over 64,000 retailers globally, it’s worth noting that many of Afterpay’s partners are smaller boutique or independent brands.
Splitit is an Australia-based payment service that enables customers to pay interest-free monthly installments for purchases in an online store or at the POS. The unique value proposition of Splitit is that it allows customers to use their existing credit cards to do so. There is no separate application, credit check, or registration process, making the transaction seamless for the end-user. Merchants and retailers using Splitit have reported a decrease in the number of users abandoning their carts (online) and increasing sales. The company’s proprietary payment technology enables merchants to offer buyers the ability to pay in monthly installments without re-entering their credit card information. The service works the same as a standard credit card transaction: the buyer selects the payment option at the Checkout stage and completes the payment. The payment is processed via Splitit, and the merchant receives his funds in regular installments over the buyer’s chosen term.
Amazon has launched several financial products over the years to help shoppers purchase products on its platform (Amazon pay, partner credit cards, etc.). So expanding its portfolio with a Buy Now Pay Later option was a natural next step for the online shopping behemoth. The process is simple: You choose an eligible product from Amazon, add it to your cart, and choose the Amazon BNPL payment option. The item ships as usual, and you pay it off over five months. Amazon will automatically charge your credit card on the due date and withdraw the amount from your account. The payment schedule is designed to help you avoid interest charges since the payments are spread over four months. That said, you may be charged interest on your credit card if you don’t make the required payments every month.
Scotiabank Select Pay – It is only a matter of time before all the major banks get into the BNPL space. Scotiabank has taken the lead and launched Select Pay, which allows customers to turn qualifying credit card purchases into a fixed monthly payment option and pay for purchases over time. It requires no additional credit checks or credit applications and can be canceled at any time.
What problems does the BNPL industry present?
In general, BNPL companies are making it easy for people to access products and services that are out of their reach by providing short-term access to funds. But this leads people to spend money on items they may not need or want. In addition, to expand their customer base, BNPL companies may end up targeting young adults without a credit card and older adults who may have been hit with identity theft and are having a difficult time getting new credit cards. This is a vulnerable population who may not have general awareness about the risks associated with using BNPL solutions.
.BNPL options can be seen across all channels (online & point of sale) and product categories (retail shopping, home improvement, healthcare & wellness, entertainment, and education). While their services can be interest-free for a few months, keep in mind that these companies are making money. BNPL lenders often charge a transaction fee to retailers who offer flexible payment plans, and this cost may be passed on to the end-user, increasing the purchase price in the process.
Despite these problems, the adoption of BNPL products is growing at a staggering pace. The emergence of BNPL as a mainstream payments provider is a fundamental shift in the fintech world and a significant step towards the disruption of the financial services sector. While it is still too early to say if these services would overtake the incumbent banks, the BNPL industry is undoubtedly here to stay. It’s a fast-growing industry, and the companies in this space are trying to gain market share at a rapid pace. They see massive growth potential, and they’re looking to lock it in.