MONTREAL — Canada’s top consumer protection agency is researching potential risks associated with the use of “buy now, pay later” plans, The Logic has learned, as the products’ surging popularity attracts scrutiny from governments around the world.

Since the start of 2021, the Financial Consumer Agency of Canada has been conducting a wide-ranging inquiry into the use of BNPL plans, seeking information through public surveys and consumer interviews, according to internal documents The Logic obtained through an access-to-information request.

The agency has also sent questionnaires to provincial and territorial authorities requesting information on consumer complaints and any efforts they’re making to oversee the rapidly growing sector, the documents show. 

Governments around the world, including in the U.K. and U.S., have been examining BNPL plans in recent months amid concerns that the loans aren’t properly regulated and could encourage reckless spending. The plans, popularized by fintech companies like Klarna, Afterpay and Affirm—which acquired Toronto’s Paybright last year—allow consumers to finance large purchases over time, typically through several interest-free installments.

The FCAC, an independent federal agency that reports to the Department of Finance, stepped up its scrutiny of BNPL in late 2020, prompting the agency to publish additional guidance about the services on its website in March, internal correspondence shows. A 52-page report on BNPL in Canada, prepared by Ekos Research Associates, was submitted to the agency in October.

BNPL has emerged as a serious challenger to the debit-card industry in recent years, particularly among younger consumers, who show a growing preference of shopping online and tend to have less disposable income. In 2020, BNPL accounted for 2.1 per cent, or roughly US$97 billion, of global e-commerce transactions, according to Worldpay—a figure that is expected to grow to as high as over US$1 trillion by 2025.

The pandemic has also accelerated its adoption as consumers make a larger share of purchases online. BNPL providers, which make money from fees paid by merchants, often advertise their plans on websites’ checkout pages, offering a convenient way for shoppers with limited credit to finance their spending. 

In Canada, hundreds of merchants are now partnering with BNPL providers, including Samsung, Wayfair and The Bay. A number of major Canadian banks have also responded to the trend by rolling out installment plans of their own. 

The easy consumer loans may come with some risks. According to one study by Credit Karma, about a third of U.S. consumers who used BNPL services have fallen behind on at least one payment, and 72 per cent of those saw their credit score decline.

In a document dated Sept. 13, the FCAC said a survey of provincial regulators raised concerns that BNPL plans could encourage “​​impulsive, unnecessary and unaffordable spending”; lead to higher debt for users through overspending, high interest rates or missed payments; and create other risks for consumers related to hidden costs or harmful disclosure practices by providers.

The agency’s survey of just over 1,000 Canadians found that a small portion of the 66 who had used BNPL had taken extreme measures to make a scheduled payment. In order to meet their obligations, eight per cent of the 66 had taken out a loan, eight per cent delayed paying another bill and five per cent overspent their credit card limit.

The top reasons consumers over 18 years old used BNPL were because they couldn’t afford the entire purchase right away, to help them budget and to avoid interest and fees, according to the FCAC’s survey. Eighteen per cent of users said they spent more using the BNPL service than they otherwise would have, with eight per cent saying they spent “much more.”

In follow-up interviews with researchers, one Ontario woman in her thirties said she first used a BNPL service to buy clothing because her credit-card balance was too high. She has since used the installment plan four more times, she said, because her card was maxed out and the smaller payments made the purchase more manageable.

BNPL providers have said that only a small percentage of users incur late fees and that the products provide greater consumer choice for financing purchases. 

Some governments have struggled to regulate consumer lending by tech companies, which are often exempt from legal requirements targeted towards banks and other financial institutions. In February, the U.K.’s Financial Conduct Authority published a review of the unsecured credit market that called for additional regulation, but the report hasn’t yet led to any new legislation.

In Canada, the FCAC has jurisdiction over federally regulated entities such as banks, insurance companies and payment card networks. It has the power to impose fines on organizations that violate consumer protection regulations, an ability the government recently strengthened. 

“As part of its mandate, FCAC oversees the compliance of federally regulated financial institutions with various consumer provisions in federal legislation and regulations,” FCAC spokesperson Michael Toope told The Logic, “such as requirements related to disclosure, minimum grace periods, debt collection practices and express consent, that could also apply to loans that [federally regulated financial institutions] are providing as a BNPL product.”

However, because some tech companies that offer BNPL aren’t covered by those regulations, responsibility for overseeing them could fall to the provinces, said Brigitte Goulard, senior counsel at Torys LLP and a former deputy commissioner of the FCAC, in an interview with The Logic.

As it stands, provincial and territorial regulators don’t have a specific framework in place to regulate BNPL. Of the five jurisdictions that had responded to the FCAC’s survey as of September, just three—New Brunswick, Nova Scotia and Quebec—had requirements for the BNPL providers’ registration or licensing, according to a summary of the responses obtained by The Logic. 

Ontario was the only province to say that it was considering developing BNPL-specific consumer protection measures, the document shows.

The FCAC’s mandate was expanded last year to give it significantly more power to impose fines on entities that violate federal regulations. The new mandate also requires that the agency monitor emerging trends that could affect consumers’ financial wellbeing and publish information about those new products and services.

“One of the things that will worry FCAC about BNPL is it may potentially increase people’s reliance on credit,” Goulard said. “Are they going to be able to do something about it? I’m not sure.”

As they expand their Canadian operations, BNPL companies have also ramped up their lobbying efforts. Representatives of San Francisco-based Affirm held three meetings with government officials in July, including one with both Finance Minister Chrystia Freeland and Innovation Minister François-Philippe Champagne. The purpose of the meetings was to “educate and partner with government in forging an equitable future financial technology and lending framework,” lobbying records show.

Affirm and the Department of Finance declined to provide additional details about the meetings. A spokesperson for Champagne declined to comment.

Lobbyists for Swedish fintech giant Klarna held two meetings with federal officials in May, while San Francisco’s Square, which announced its plan to buy Australian BNPL provider Afterpay in August, has registered two lobbying meetings since then, though federal records don’t specify whether they discussed BNPL.

“Until the [Afterpay] deal closes, we can’t discuss with stakeholders beyond what’s already been said in our press release,” Square spokesperson Leslie Jackson told The Logic. 

Klarna didn’t provide comment on the lobbying records.

In an interview with The Logic in August, Zahir Khoja, Afterpay’s general manager for North America, said the company has been in touch with officials around the world to educate them about its product. The company is one of several BNPL providers that have increased their presences in Canada over the last year.

“As the world continues to evolve around this space, we continue to work with the regulators in the respective markets as partners,” Khoja said.