Like Canada’s banks, Shopify and other Canadian fintechs that lend money are increasingly taking hits from bad loans, putting more money aside to cover them as high interest rates put pressure on borrowers.

Banks have made it harder for consumers and businesses to qualify for loans in recent years, amid concerns over borrowers becoming unable to make growing payments. The Logic’s analysis of financial statements and other corporate documents from five Canadian publicly traded fintech lenders—Shopify, Lightspeed, Goeasy, Propel Holdings and Mogo—shows that their lending businesses have grown considerably, but so have their bad debts.

Michael Imerman, a finance professor at the University of California at Irvine and co-author of the forthcoming book The Economics of FinTech, said it’s hard to tell whether the growth in delinquencies and loan-loss provisions among these companies is a sign of trouble. While banks have a regulated and standardized approach to managing and disclosing credit risk, fintechs do not, he said.

Fintechs are “providing similar, or in many cases the same, services as a bank, but not within the regulatory framework that we have established,” Imerman said. “That poses risks to the firm, to the shareholders and to the broader economy.”

Provisions for loan losses, or money that lenders set aside to cover future delinquencies, were in the spotlight as Canada’s big banks reported earnings in late August. These cushion against economic shocks, but also eat into lenders’ profits and stock prices.

The Bank of Canada cut interest rates last week and indicated more cuts are coming, but borrowers continue to have trouble meeting high mortgage, credit card and car payments. If the rate cuts don’t have the intended effect of stimulating economic growth, people could start losing their jobs at a time when they’re also dealing with higher loan payments, potentially sparking a vicious cycle leading to home and business defaults.

Global regulators have been sounding the alarm about a new complication to this classic problem of capitalism. Non-bank firms—including some of Canada’s biggest tech companies—are increasingly getting into the lending business. This expands access to capital, but adds a new element of risk to the financial system, as well as to the companies themselves.

For now, that risk is relatively small for the companies The Logic examined. Shopify, for example, set US$28 million aside to cover loans it thinks might go bad in the quarter ending June 30, 2024—a fraction of the more than US$2 billion in revenue it brought in in that quarter.

Ottawa-founded Shopify and Montreal-based Lightspeed, both heavy hitters in e-commerce software, use data they’ve collected on their customers’ sales to help them decide to whom they lend. Shopify’s loan program, called Shopify Capital, has been a major source of growth and helped drive record revenue in 2023.

The US$28 million Shopify set aside to cover potentially bad loans in Q2 2024 rose from US$19 million the same quarter last year, according to its financial statements. The provision increased at a faster rate than Shopify’s total outstanding loans, which grew to US$850 million in Q2 2024 from US$719 million the year before. Shopify did not respond to a request for comment.

Lightspeed doesn’t report a provision for its Lightspeed Capital merchant cash advances, but corporate documents show delinquencies are increasing. In the same quarter of 2024, Lightspeed had US$87.5 million in outstanding loans and wrote off US$2.6 million as uncollectible, up from US$40.5 million in total loans and US$700,000 in writeoffs the previous year.

In an email, Lightspeed spokesperson Elizabeth McPhedran said uncollectible cash advances are growing at a rate similar to the company’s overall loan book. “Lightspeed carefully and systematically evaluates merchant eligibility for the Lightspeed Capital merchant cash advance program and only extends advances to merchants who meet its stringent qualifying criteria,” she said.

Nuvei—another Montreal-based e-commerce software company that, like Lightspeed, is publicly traded pending the closing of a privatization deal—offers a similar loan program to its customers. However, Nuvei does not break out information about that program in its financial statements. Nuvei did not respond to a request for comment.

Meanwhile, Propel, Goeasy and Mogo make high-interest loans to consumers who may not have the credit scores needed to borrow from banks. In the first quarter of 2024, Goeasy reported credit applications jumped a record 41 per cent compared to the previous year, while Propel attributed its “strongest first quarter in history” to “strong consumer demand” and “continued tightening across the credit spectrum.”

In their second-quarter financials, Propel, Goeasy and Mogo all disclosed that bad debts are increasing, and that they’re preparing for them to increase further. Propel set US$53.3 million aside “for loan losses and other liabilities,” up from US$36.2 million last year. Mogo set aside $4.3 million, up from $3 million last year, while Goeasy estimated it may lose $18.4 million to bad debts, compared to $13.5 million the previous year.

Goeasy declined to comment. In a corporate document, Goeasy said the increase in its estimated future bad debt losses is mostly because consumer loans grew overall. The credit quality of its borrowers is improving and there are signs of green shoots in the broader economy, the document said.

In an emailed statement, Propel spokesperson Lindsay Finneran-Gingras said the company’s artificial intelligence software lets it responsibly offer credit to people who would not otherwise be able to access it. As a percentage of revenue, Propel’s provision for loan losses in the quarter declined compared to the previous year and writeoffs are “well within our target range,” she said.

Craig Armitage, a public relations professional, said in a statement on behalf of Mogo that the fintech has more than 20 years of experience lending in Canada, “which gives us confidence in our ability to manage through various market conditions.” Scott Buck, an analyst who covers Mogo at New York City investment bank H.C. Wainwright, said he thinks the company is being responsible by setting more money aside for potential bad loans and is well prepared for a shock.

“Increasing provisioning is probably a conservative decision, given where we are in the macroeconomic environment,” Buck said. “​​You’ve had two or three years now of elevated pricing, and people are stretched pretty thin.”