It’s going to be a strange, back-to-school shopping season this year.
It’s not just that COVID-19 has retailers advertising kids’ face masks right next to T-shirts, pencils and laptops. There’s another novelty many online shoppers will notice: you can now buy something as inexpensive as a pair of shoes in installments.
“These buy-now-pay-later (BNPL) services are new and quickly gaining popularity,” the Better Business Bureau (BBB) said in a press release this week. And while the idea may sound “great,” consumers should “be careful,” the bureau warned.
The majority of websites where the BBB has spotted the option to pay for small purchases in installments sell clothing and electronics, says Shawna-Kay Thomas, communications specialist at the BBB serving Southern Alberta and East Kootenay.
“College students may be targeted, high-school students may be targeted, because they may not have all that disposable money at once,” Thomas says.
But the financial companies that offer the service tend to take a radically different view, arguing the new incarnation of BNPL can be a cheaper alternative to traditional credit card purchases.
“It really is an alternative to a credit card in many ways,” says Wayne Pommen, president and CEO of PayBright, a Canadian payments platform that offers consumers the option to split smaller purchases into four bi-weekly payments or pay for larger expenses in monthly installments.
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How it works
Often, the option to buy now, pay later comes at check-out. On a growing number of online retail sites, consumers are noticing, among various payment methods, the possibility to pay for a purchase in a set amount of installments.
Often, the service comes from third-party financial companies that make money by charging retailers a small percentage of the sale and by collecting fees and interest from consumers, according to the BBB.
Interest rates can go from zero to 30 per cent, with installment payments lasting from a few weeks up to 39 months, the BBB said.
And consumers usually need to be vetted by the financing company before being able to sign on to the service for the first time.
At PayBright, the option to split a purchase into four payments — what the company calls “Pay in 4” — comes with a zero interest rate. Pay in 4 is available for amounts as low as $35, Pommen says.
Monthly payment plans are from zero per cent interest and are typically geared toward larger purchases.
The payments are automatic and usually linked to customers’ bank accounts or debit cards, though a minority chooses to link them to their credit cards.
Late payments incur a flat fee of $10 for each payment or $30 per payment for larger transactions spread out over payment periods of 12 months or more, Pommen says. But only one or two per cent of PayBright customers end up paying these fees, Pommen says.
“Our intention is not to make what we call negative revenue — revenue from people making mistakes or going off-track,” he says.
Instead, the bulk of the money comes from retailers paying PayBright for the service, which Pommen says has shown to increase online traffic, boost customer loyalty, help convert leads into purchases and reduce the share of shoppers who put something into their digital cart only to navigate away without buying.
That helps explain the popularity of the new BNPL model, according to Pommen. In Australia, for example, eight per cent of all e-commerce purchases have shifted to that model, while credit card accounts have been on the decline, he says.
But another option for splitting small purchases into even smaller payments is now available directly through consumers’ credit cards.
In September 2019, for example, CIBC launched CIBC Pace It, which allows clients with accounts in good standing to split eligible card purchases into smaller payments spread out over a fixed term at a lower annual interest rate. (The service is not currently available in Quebec.)
There are three options: six monthly payments at an annual rate of 5.99 per cent; 12 monthly payments at 6.99 per cent; or 24 monthly payments at 7.99 per cent. There is also a one-time set-up fee of 1.5 per cent of the purchase amount for converting a credit card charge to an installment plan.
The original minimum purchase was $250, though the bank temporarily lowered it to $100 amid the pandemic.
And if a client misses a payment, the unpaid principal portion is treated like a regular outstanding balance.
“CIBC Pace It is a simple and convenient option that helps clients manage their cash flow,” said Laura Dottori-Attanasio, group head of personal and business banking at CIBC, in an email.
The service gives clients “greater control over their monthly finances and the flexibility to pay off their purchases at any time,” she added.
RBC and TD told Global News they do not currently offer a similar service. BMO and Scotiabank did not respond to inquiries about whether they offer a similar payment plan.
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The BNPL trend goes well beyond back-to-school, according to Pommen, who adds that most of PayBright customers are in their late 20s and 30s.
While the most advanced BNPL market is Australia, according to Pommen, BNPL platforms are also rapidly catching on in the U.S.
In Canada, it was the pandemic that gave BNPL a big boost in popularity among both consumers and retailers.
With consumers much more likely to shop online and many retailers forced to pivot to digital sales in a hurry, PayBright says its e-commerce gross merchandise volume has more than doubled since early March.
The company has now partnered with companies ranging from online retailers like Wayfair.ca and eBay Canada through chains like Sleep Country and The Source and smaller merchants who sell through Shopify, Pommen noted in a recent blog post.
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Good or bad for consumers?
The way Pommen sees it, the new version of BNPL is a win for consumers.
Periodic, automatic payments make it easier to budget and stay on top of expenses, he argues. And the business model means the majority of the cost is borne by retailers, with consumers often able to spread out payments at no cost at all.
But BNPL options are often miniature loans, which can have implications for customers’ credit scores.
One risk is, quite simply, that some consumers will miss their payments.
“Keep in mind that unpaid debts can be sent to collections agencies and after a delinquent period of 90 days can be reported to credit bureaus. This could have a negative impact on your credit score,” the BBB warned.
PayBright says it doesn’t send accounts tied to small-ticket purchases to collection agencies and that less than one per cent of its transactions end up in collection.
But there’s a chance that taking out a new loan could impact your credit even if you do pay in full and on time, all the time, says Julie Kuzmic, director of consumer advocacy at Equifax Canada.
“One thing for people to be aware of is that when you add new accounts to your credit file, you are reducing calculations like the average age of your accounts. And that is a factor in the calculation of a credit score,” Kuzmic says.
There could be a downward impact for some consumers, especially if the mini loans don’t stay open for very long. On the other hand, some people would see no impact at all, according to Kuzmic.
The general rule of thumb, she says, is “the longer and more solid your credit history is, the less impact these types of things will have.”
Pommen says PayBright doesn’t do credit checks for Pay in 4, while there’s an instant credit check for larger purchases.
Also, while PayBright focuses on lending to well-qualified borrowers, it may refer consumers who don’t qualify for its loans to a third-party company called EasyFinancial, which offers loans for credit-challenged borrowers.
“If a retailer would like, we integrate EasyFinancial into our user flow so that if customers are not approved by PayBright, they instantly have the option of proceeding with EasyFinancial,” Pommen says.
The BBB urges consumers to check the fine print.
“Find out what company is financing your purchase, how long you have to pay off the purchase and in how many installments, how they handle late payments, and how much interest you’ll be charged, if any.”
But some researchers argue the biggest risk of the new BNPL platforms is that they make it even easier for consumers to overspend and fall for impulse buys.
“If everyone were completely rational and had unlimited self-control and we weren’t subject to advertising and marketing, then, by all means, this would be a great product, an option for people,” says Mariel Beasley, co-founder of the Common Cents Lab, a financial behaviour research centre at Duke University.
The reality, though, is that research shows human beings are anything but, Beasley argues.
In practice, seeing a purchase split up into very small payments reduces what Beasley calls “the pain of paying,” that uneasy feeling most of us experience when we’re separated from our money.
While paying in cash results in the biggest pain of paying, which makes us more likely to think twice about what we’re spending money on, the new BNPL options reduce that pain even more than credit cards, which separate the buying process from the having-to-pay process, Beasley says.
Worse, the human brain turns out to be quite bad at adding up small payments, she adds.
“If you actually have lots of different products that you purchased with this, and each one is like $20 dollars here, $40 here, another $10 there, we actually have a really hard time summing up the total cost of that.”
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