Buy now, pay later lenders are on the move, but their revolution is far from certain in Canada


Afterpay has seen its volumes grow at an annual compound rate of 105% over the past two years by allowing customers to split their purchase into four interest-free installments.

DADO RUVIC / Reuters

The recent wave of deals for buy-now lenders, including the acquisition of Afterpay Ltd. by Square Inc., is rekindling speculation about a widespread disruption in financial services, echoing the hysteria sparked by fintech startups about five years ago.

“This decade is going to be the shake-up of the banking industry,” Sebastian Siemiatkowski, managing director of Swedish lender BNPL Klarna, one of the world’s largest, told CNBC last week.

The Reality: Much like the latest wave of fintech hype, a revolution is far from certain. New lenders have taken market share as e-commerce sales increased during the pandemic, stealing credit card transaction volumes and customer purchase data in the process, but incumbents, notably banks and credit card companies, are racing to compete – and these giants dominate, especially in Canada.

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Two days after Square announced its successful acquisition last week, the Bank of Nova Scotia unveiled its own installment payment program, echoing previous launches by the Canadian Imperial Bank of Commerce and the Royal Bank of Canada.

For its part, Visa Inc. announced a partnership with Global Payments and Desjardins Group in mid-July to launch its own installment payment program across Canada. The service will allow buyers to divide their purchases into smaller and equal payments over a set period of time.

Buy-it-now lenders have been around for decades, and offer the types of financing traditionally advertised in TV commercials, such as no down payment and long-term installment payments.

Historically, lenders were banks that partnered with retailers through private label credit card divisions, or were retailers themselves, like Sears, that had internal lending programs. But the service lost its luster because it was cumbersome – customers had to manually fill out forms in-store, then wait for the risk department to approve the credit. “It was a pretty fragile process. It was a little complicated, ”said John Armstrong, national financial services industry leader at KPMG Canada, in an interview.

New generation of lenders like Afterpay and Affirm are integrating into e-commerce platforms, offering payment plans online and in apps alongside the ‘Add to Cart’ button before a customer decides to pay. . The process today, Mr. Armstrong said, “is just very easy.”

Afterpay, which is based in Australia and has yet to make a profit, has seen its volumes increase at an annual compound rate of 105% over the past two years by allowing customers to split their purchase into four interest-free installments. Customers only pay a fee if they miss an automated payment, and when that happens, their account is locked out until the balance is paid off.

In Canada, several lenders have embarked on the gold rush, and some have already cashed in. PayBright and Flexiti Financial Inc. were acquired within the past eight months. New Flexiti loans have grown to around US $ 292 million in 2020, up from US $ 49 million in 2017.

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The threat from BNPL is worrying for Canadian banks as credit cards are one of their higher margin products. Yet Canada has always been a difficult market for newcomers to enter. The Big Six banks dominate here, while the United States is much more fragmented.

Canadians have also been supporters of their banks, proud of how they endured calamities such as the 2008 global financial crisis by being in good standing with their global peers. “Banks have a lot of brand equity,” said Mr. Armstrong of KPMG.

To complicate matters for startups, Big Six lenders have learned a thing or two from carriers and offer packages that give their customers less reason to try competing services. That’s part of why money transfer apps like Venmo haven’t taken off here; Free Interac e-transfers are often included in chequing account plans.

Canadians are obsessed with loyalty programs as well, and banks know it – which is why travel rewards cards had such weight before the pandemic. Expect incumbents to take advantage of this to keep customers tied to their current cards.

Despite all the current hype, no one is sure exactly how the BNPL market will rock – in Canada or around the world. On the one hand, these lenders are promoting themselves as the consumer friendly option, but the industry is rife with hidden fees, with some lenders imposing stiff penalties for missing payments.

RBC researched the market for two years before launching their product in January, Amit Sadhu, the bank’s vice president, said in an interview, and decided the best way to do this was to offer a clean product. no hidden costs. The bank also requires users to repay their loans using their bank accounts, not some other form of credit.

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The future participation of traders is also a major unknown. BNPL lenders often tout all the retailers they have partnered with, but these merchants pay hefty fees, often 2-8% of the cost of the item purchased. The hope is that the partnership will increase sales, but if lasting revenue increases don’t materialize, paying such a huge cut might not be worth it.

And then there is the threat of tighter regulation. This year the UK financial regulator published its review of the industry and found billions of pounds being loaned in unregulated transactions. Many borrowers were also unaware that late payment fees were possible – instead, they thought the services were nothing more than a debit card.

The UK watchdog called for comprehensive regulation of the industry, while Sweden, where Klarna is based, introduced legislation to prevent BNPL offers from showing up ahead of low-cost direct payment options online. If more rules emerge, it could slow the growth of the sector, giving incumbents time to catch up.

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NB This English text is an unofficial translation of the Swedish original of the invitation …

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