This article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.
“Pay in four easy payments” and similar messages have recently started appearing on the screens of Canadians checking out their online shopping carts. What’s being introduced to them is part of a growing global trend, specifically the rise of financial technology (or fintech) “Buy now, pay later” instalment payment providers (BNPL providers).
Unlike traditional instalment payment providers, these companies typically refrain from predatory practices and in many cases do not charge interest on purchases.
BNPL providers have become popular with consumers around the world. However, because they typically do not charge interest and lend money in non-traditional ways, some have attempted to circumvent consumer protection rules by arguing that they operate in regulatory blind spots.
With BNPL providers like Affirm recently partnering with Shopify for instalment payments in the United States, proactive regulations that specifically govern the actions of BNPL providers may be beneficial to protecting Canadian consumers’ financial health.
What are BNPL providers?
BNPL providers are point-of-sale payment solutions that allow individuals to purchase and own products immediately, without requiring them to pay for the entire purchase price of the item upfront. Another appealing aspect is that the approval process to qualify for instalment payment plans can be very simple. In certain countries, Sweden-based Klarna requires only a person’s name and phone number to be approved for an instalment payment plan.
According to McKinsey & Company’s “Global Payments Report 2019,” BNPL providers’ ability to underwrite purchases by providing rapid automated financing decision making during the checkout process has been a key factor in both retailers and consumers embracing them.
Across the United States, Australia and the United Kingdom, retailers have been adopting BNPL providers because of their ability to drastically increase retailers’ average online order value (in some cases up to 30 per cent) and purchaser frequency. Due to these benefits, BNPL providers have commercialized their services by charging retailers commissions and charging consumers late fees (typically capped at under $100). The most common form of non-monetary recourse used by BNPL providers to incentivize repayment from consumers has been to freeze future borrowing from the provider until the outstanding late balance is repaid.
International regulatory scrutiny
As a result of BNPL providers’ global growth and popularity, there has been increasing regulatory scrutiny of their practices. In the United Kingdom, the Financial Conduct Authority (FCA) in 2019 took issue with the practice of backdating interest on amounts repaid during the instalment grace period, a practice not commonly employed by the leading BNPL providers.
The FCA eventually banned that practice. It took further action through mandating more comprehensive disclosure of instalment payment plan terms in the United Kingdom, as well as requiring reminders of instalment payment deadlines to help prevent consumers from mistakenly missing repayment deadlines.
In Australia, the Reserve Bank of Australia is currently considering classifying BNPL providers as payment systems, which may render unenforceable their current imposition of “no surcharge” contractual provisions on merchants. These provisions restrict merchants’ ability to pass onto their customers the commissions they pay to BNPL providers.
From a consumer protection standpoint, these provisions are argued to both disadvantage smaller retailers and increase the cost of goods for customers who do not use BNPL providers. This was reflected in Visa and MasterCard’s Ontario settlement in 2018 of a long-standing class action, which required modifications to their “no surcharge” rules (see Bancroft-Snell v. Visa Canada Corporation 2018 ONSC 5166). It’s interesting to note that Toronto-based PayBright currently imposes “no surcharge” terms on its merchants.
BNPL in Canada and benefit of proactive regulation
Relative to other countries, BNPL provider usage in Canada is low and nascent but growing quickly. This is reflected in the lack of judicial or regulatory action related to their use. The only notable regulatory activity related to instalment payment providers has been the Competition Bureau’s accusations against furniture retailer Leon’s for deceptively marketing a “buy now, pay later” promotion.
At issue was the fact that consumers were charged upfront fees without being provided with clear and accurate information about them. The matter was settled through mediation in 2018. The Financial Consumer Agency of Canada has noted that in Canada most instalment plans currently offered are repackaged retail credit cards or personal loans; however, the competitive landscape is changing.
PayBright and Minneapolis-based Sezzle (which operates globally) are currently the two largest fintech BNPL providers in Canada. Their flagship offerings incorporate consumer protections that help prevent rapid debt spiralling, deteriorating credit scores and other debt traps associated with traditional credit product late payments. However, Sezzle’s brief ban and penalties for operating in California without a lending licence demonstrates the need to legislatively clarify its operations.
In addition to the need for protective regulations surrounding BNPL providers’ operations, their ability to make products seemingly more affordable also comes with risks for consumers.
For example, the Australian Securities & Investments Commission found that 81 per cent of consumers believe BNPL provider arrangements allowed them to buy more expensive items that they otherwise could not afford in one payment and that 64 per cent would spend more than they normally would. Coupled with the ability to use multiple BNPL providers spread over different purchases, many people run the risk of not being able to calculate the true cost of their total purchases, potentially overextending themselves financially.
For the reasons noted, it is important to consider introducing measures that can ensure Canadians’ financial health is not negatively impacted as BNPL providers’ usage grows. These measures can include requiring BNPL providers to: a) properly inform consumers on the structure and potential costs of the instalment plan; b) conduct risk assessments to prevent users from overextending themselves financially; c) not charge unreasonable fees; d) co-ordinate with each other on consumers’ usage across services to determine whether the user has defaulted with any of them; and e) provide financial assistance services.
BNPL providers are widely considered to be preferred alternatives to traditional credit providers for consumers but are not without their own set of risks. Therefore, it is important for them to be properly regulated so that their growth is not hindered by bad actors in the sector. If appropriate regulations are implemented early on, BNPL providers’ continued growth in Canada can occur responsibly with minimal risk to Canadians’ financial health.
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