As the cost of housing, food, and all necessities jumped this past year, Canadians are still feeling the destructive impacts of the COVID-19 pandemic. The Consumer Price Index (CPI), a standard measure of inflation, averaged an increase of 6.8% in 2022, making it the largest rise in the past 40 years. Increasingly, unaffordable prices and the pervasiveness of online shopping have opened the gates for the surge in Buy Now Pay Later (BNPL) shopping. With a global market value of 90 billion (USD) in 2020 and an expected value of over 3.9 trillion (USD) by 2030, the BNPL boom sees few signs of stopping. 

BNPL allows consumers to pay a fraction of the price of a product, usually 25%, and then pay the rest over the following months. The most common forms are composed of four payments, each spaced out by two weeks, automatically billed to the buyer's bank. Appeal for this short-term financing comes from its ease of use and lack of interest fees as long as the installments are paid on time. Despite charging higher costs to retailers than credit cards, BNPL is still widely available thanks to increased consumption. Customers only see the gradual hits to their bank accounts, which is why almost 70% of users admit to spending more than they would if they had to pay for everything upfront. 

At first glance, this is a practical form of credit that allows lower-income groups to afford what they need without interest. To others, it is an irresistible opportunity to feed their shopping addictions. Either way, it isn't inherently unfair as long as adequate regulations protect consumers.

However, the United States Consumer Financial Protection Bureau raised major concerns in a September 2022 report on "Buy Now, Pay Later." The first apparent risk was "discrete consumer harm," involving a lack of disclosures to consumers and hurdles in filing complaints. The Bureau also expressed concern about the level of data harvesting and lack of privacy from companies used to extract the most money from borrowers. Their final issue regarded overextension through loan staking, which can cause borrowers to take on too many loans without oversight. An overarching message was that many of these consumer protections are standard on other forms of credit. Comparable lending markets, including credit cards, mortgages, and auto loans, face much stricter standards because of past predatory behavior or collapses in their markets. 

The United States Truth in Lending Act requires extensive disclosures for unsecured consumer loans if payments are divided into five or more. Conveniently, the most popular BNPL loans, composed of four payments, avoid such requirements. Without clear language on when payments are due and how fees are assessed, the system can be engineered to confuse consumers on how much money they owe. It’s easy to see that for those that use five or more BNPL services, it can become nearly impossible to track what is left to pay off. Due to this, the Bureau intends to monitor and assess the industry and decide if more regulation is needed. 

On the 20th of June 2022, the UK government confirmed plans to regulate BNPL this coming year to protect the "millions of people [...] from the potential risk of harm". This will ensure lenders carry out affordability checks and that their advertisements remain fair, clear, and not misleading. Most importantly, this legislation will require lenders offering BNPL to be approved by the Financial Conduct Authority to guarantee proper protection. 

In the European Union, similar regulations allow BNPL services to fall outside of the scope of the Consumer Credit Directive, which is now being revisited to include them. Currently, companies can market free of charge with no warning about the potential consequences of not paying, despite late fees surpassing 200% in interest. Marketing that the service doesn’t affect credit scores is common, even though falling behind on payments allows many companies to inform debt collection agencies. Such deceptive advertising tends to target misinformed young and low-income adults that need the loans the most.

The Financial Consumer Agency of Canada (FCAC) published, in November 2021, a pilot study on BNPL, which gave the Agency insights into the use of the loans. As expected, most consumers were 18 to 44, mainly using it for budgeting or unaffordable purchases. Although the report identified potential risks of over-borrowing and over-indebtedness, it fell short of recommending regulations or oversight. A clear advantage in Canada is that BNPL is already technically regulated as loans, so some information about interests and fees must be disclosed to consumers. A serious complication is that most regulation decisions remain in the provinces' hands, forcing companies to keep track of regional differences. 

Unfortunately, the few enacted effective protections remain the exception, not the norm. This first wave of regulations will hopefully set the standard for minimal loan stacking, accurate advertising, and generally enhanced consumer protection. With fast-acting, proactive governments, there is still an opportunity to curb crippling and unnecessary debt.