Buy Now, Pay Later—A Deep Dive.

Buy Now, Pay Later is a relatively new concept in Canada. Though non-mortgage household debt in Canada is contracting (decreasing), “BNPL” use shows strong growth across the country.

For many consumers, it is hard to stomach large, one-time purchases with their credit cards. From the psychological effect of spending a lot of money on a purchase to not covering paying off their credit card bill, consumers now have another credit option to pay for what they buy.

Known simply as “Buy Now, Pay Later” or “BNPL,” this purchase financing option mitigates the above effects. We’ll explore what BNPL is, how it works, and some of the foremost providers of this service. We’ll also discuss whether this relatively new payment option directly threatens the credit card industry and BNPL’s potential impact on the related debt.


Buy Now, Pay Later in Canada. What is it?

BNPL is a payment option for consumers to purchase goods or services in installments rather than in cash lump sum or with a high-interest credit card. And sometimes with no interest.

For example, Chris wants to buy a QLED 8K Smart TV that costs $4,500. This $4,500 is significantly above their credit card limit, but with BNPL, they can pay off the TV in installments. With BNPL, Chris pays a set percentage of the $4,500, perhaps 25% or $1125, and then the rest of the TV’s cost in a set number of installments. 

Again, the attractive feature of BNPL is that you won’t be charged interest in some instances. However, you’ll pay interest or fees if you miss an installment.

The installment payments are usually made at set intervals. If we go back to Chris’ example, after paying off the 25% down payment on the TV, they still have $3,375 left to pay back in installments. Depending on the BNPL provider Chris chooses, the remaining $3,375 is paid back in a pre-set payment agreement. Chris pays $337.50 for each installment, which is spread apart by one month. Thus, Chris pays back the remaining $3,375 within ten months ($337.50 x 10 months = $3,375), often interest-free.


How To Select a BNPL Payment Option

To pay for your purchase with BNPL, your chosen retailer must offer this payment option. Not every retailer offers Buy Now, Pay Later in Canada. And, even more important to note is that not everyone qualifies for BNPL.

If a retailer offers Buy Now, Pay Later, you simply select the BNPL option at checkout, upon which you provide a few personal and financial details. Once complete, you will receive approval or rejection for the transaction. This decision considers a few factors, the most important being your credit score. If your credit rating is low, you’ll likely receive a rejection for the transaction.

An essential point about Buy Now, Pay Later in Canada is that it’s an alternative and viable payment solution for consumers with consistent debt repayment history. Canadians can also build a “credit history” with specific BNPL companies as they may more purchases and complete payment plans.

If approved for BNPL, you’ll repay the balance in installments after an initial down payment on the item you wish to buy. Repaying these installments is done in a few different ways. For example, you can pay by paper cheque, a bank transfer, or deduct it from your debit card. These options offer buyers more flexibility when paying off their BNPL purchase balance.


Is BNPL a Credit Card Disruptor?

Buy Now, Pay Later in Canada is a popular form of payment exacerbated by the pandemic. As many consumers transitioned to online shipping, the increase in BNPL payment options by online retailers grew to meet consumer demand.

The rise in BNPL options has led to an obvious question: Is this payment option a direct threat to the credit card industry? BNPL, of course, means that fewer people are paying by credit card. You can assume that this affects credit card companies, and you are right. However, there is a bit more to this.

Yes, Buy Now, Pay Later is a direct threat to the Canadian credit card industry because more consumers are using this option. Less money is going to credit card companies such as Visa, American Express, and Mastercard. These credit card providers rely on the micro-fees they charge retailers for accepting their credit cards. 

However, Buy Now, Pay Later in Canada has risks from which the credit card industry can benefit. One of these risks is increasing consumer debt. While BNPL is an attractive payment option, it’s still a form of lending you need to pay off, much like a credit card. So a rapidly rising increase in BNPL could lead consumers to sign-up for more credit cards to help pay off their Buy Now, Pay Later debt, which would benefit credit card companies.

Credit card companies like Visa and Mastercard see BNPL as a massive opportunity. As a result, they have already begun trying to leverage this new payment form by introducing their own versions of BNPL. It’s possible they will tie these versions to their credit cards in the foreseeable future.

The big credit card companies aren’t going anywhere. But the heat from BNPL is real. Visa and Mastercard have already shown they can convert this threat into an opportunity by expanding similar offerings to their customers.


Best Buy Now, Pay Later in Canada

The increase in Buy Now, Pay Later in Canada has led to the founding of several companies offering the payment form. These are a handful of the biggest BNPL companies in Canada today.


Affirm

Affirm is Canada’s most popular Buy Now, Pay Later payment solution. Many large retailers use Affirm, including Walmart and Expedia. Affirm is a publicly-traded company. Though its stock price tumbled in 2022, its 2022 Q2 revenue grew 39.1% year-over-year. Affirm is the fastest-growing Buy Now, Pay Later company in Canada, and the company expects its 2022 revenue to top $1.3 billion.

Many retailers and consumers prefer Affirm because it allows buying options for big-ticket items up to $17,500. However, the catch is that retailers can charge pretty high-interest rates ranging from 10-30%.

Since Affirm allows for higher-priced purchases, you can set the repayment schedule intervals to 3, 6, 9, or 12 months. This is considerably longer than other BNPL companies that typically spread them out by a few weeks or months.


Afterpay

Afterpay is a BNPL solution targetting a younger demographic, such as Millennials or Generation Z. Forever 21 and Old Navy are a couple of retailers currently using it.

Afterpay offers a more innovative payment solution that ensures consumers can pay for the entirety of their purchases. In addition, when you download their mobile app, you’ll receive regular loan status notifications, including payment reminders.

Afterpay does not charge interest when repayments are made on time. But when they are not, borrowers are hit with a minimum $10 penalty to a maximum of 25% of their total purchase price (depending on the retailer).


Paybright by Affirm

Affirm recently acquired Paybright. It is a very flexible Buy Now, Pay Later option in Canada. It provides Canadian consumers with small- or big-ticket purchasing power but with borrower-set repayment terms.

You can pay off the balance in four interest-free bi-weekly payments for smaller purchases. For larger transactions, you can make automatic monthly payments from six months to five years.

Paybright does not charge you any fees for late payments. However, Paybright reserves the right to deem you ineligible for future purchases using their service if your payment is late.

Some of the more notable retailers that use Paybright as a Buy Now, Pay Later in Canada include Samsung and Wayfair.


Wrapping It Up

Buy Now, Pay Later in Canada is a revolution. On top of being an industry on the rise, this payment solution is also forcing other non-BNPL payment providers to explore offering this to their customers.

The BNPL industry is expected to exceed $90 billion annually by 2029. Digital payment companies like Square and PayPal are already exploring this option as another opportunity to engage their existing customers in a new way.

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