Buy now, pain later?

Hey there, time traveller!
This article was published 08/10/2022 (1181 days ago), so information in it may no longer be current.

What’s old is new again, an adage that’s certainly proving true with the recent evolution of buy now, pay later plans.

BNPL — as it’s now called — has been around for more than a century, as a Bloomberg feature from last year noted, citing how these plans took off in the 1800s for Singer sewing machines, which were sold for “a dollar down, dollar a week.”

Since then most people have become familiar with BNPL especially when purchasing a new bed or appliance.

Yet BNPL has some new cachet among online shoppers in recent years in the U.S. and even more recently in Canada with Apple Pay Later launching in May. Then last month, Square announced an integration with an Australian company called Afterpay, owned by Square’s parent company Block, offering consumers yet another means to buy online.

“Certainly in the U.S. during the pandemic, BNPL has been growing like crazy, and now it’s happening in Canada too,” says Kelley Keehn, personal finance educator and author of Talk Money to Me, and the upcoming Rich Girl, Broke Girl.

She points to a recent report by Research and Markets, forecasting BNPL payments will grow about 63 per cent in 2022 exceeding $7-billion worth of transactions in Canada.

BNPL’s re-emergence comes at a time when credit card debt is rising, as a recent study by JD Power shows.

The number of Canadian consumers with revolving credit card debt grew to 31 per cent so far this year, up from 24 per cent last year, the JD Power report reveals.

Managing director of payments intelligence at J.D. Power John Cabell says rising credit card debt is one driver behind BNPL’s rise.

“As consumers face financial challenges in the economy, they are looking for other ways to avoid incurring debt, and so the timing for buy now, pay later is maybe perfect.”

Indeed, BNPL does offer an advantage for some consumers.

“When people are using buy now, pay later within their budget, instead of using their credit card, and just making the minimum payment, that’s good news,” Keehn says.

“I am a big fan of anytime you don’t have to put something onto your high-interest-rate credit card.”

Yet BNPL is only advantageous if consumers can actually afford to make those future payments, she adds.

“Knowing your cash flow is important whether that’s with Afterpay or a credit card.”

Licensed insolvency trustee Michelle K. Statz says BNPL can be helpful for consumers, but she worries it is likely to be used by those who are already in financial trouble.

“In an ideal world, if BNPL works like it should, and it’s helpful,” says Statz with Bromwich + Smith in Regina.

“But it’s more likely that people who are already tapped out on credit cards will be using it, potentially making their situation worse.”

Given this potential, Statz points to BNPL being on the “radar of the Financial Consumer Agency of Canada given its mandate to watch these kinds of trends and their impact.”

In fact, the federal consumer watchdog agency recently released the findings of a pilot study that found only about eight per cent of more than 1,000 people surveyed had used BNPL.

Among its key findings were:

• of the 66 respondents who did use BNPL, nearly half were younger than age 44;

• 42 per cent stated they used BNPL to make a purchase within their budget;

• 39 per cent indicated using it because they could not afford the item immediately;

• 23 per cent stated they did so to avoid interest charges;

• 49 of the 66 spent more than $200;

• about 20 per cent noted spending more than they would otherwise;

• 39 per cent purchased furniture and appliances, 32 per cent bought electronics, and 23 per cent bought clothing and fashion.

Cabell notes BNPL has long been a viable strategy for large purchases, like appliances, for consumers who cannot pay the full amount right away.

“But with inflation, we’re seeing in the U.S. more growth of BNPL … for things like cat food.”

As highlighted in a recent New York Times feature, individuals in the U.S. are using BNPL to purchase groceries because they had no other means to do so.

Presumably, these individuals would be able to pay the instalments over the next few weeks.

Yet what happens if they can’t?

According to Afterpay, consumers’ accounts are paused when they are in arrears until repayments are made, but no late fees are charged. (Notably, the company makes most of its money from fees charged to merchants rather than interest and late charges to consumers.)

“In most cases, if you miss a payment, you’re either going to pay interest or pay some sort of a fee,” Cabell notes.

“And that is unfortunately happening in the U.S. close to a third of the time among younger consumers.”

So far Statz has yet to see BNPL among the debts of insolvent clients she works with, but she suspects she will soon enough.

“Given social media’s keeping-up-with-the-Joneses effect with online shopping, my take is (BNPL) will work to a lot of people’s detriment.”