With buy-now, pay-later services exploding in popularity, one big international fintech player is pushing to make sure it has a say if Canada decides to make rules to govern them.

“When considering policy related to the [buy-now, pay-later] sector, it is Afterpay’s view that consumer outcomes should remain the focus,” reads a document the Australian fintech giant submitted to the House of Commons finance committee ahead of the upcoming federal budget. 

In the submission, Afterpay describes itself as a “global disruptor” and says it offers consumers a healthy alternative to credit cards. “Any policy should address the potential consumer harm that may be associated with a particular business model. Importantly, it should also recognize and encourage new products that provide better consumer outcomes compared to traditional credit products.”

The use of buy-now, pay-later services, or BNPL—which let shoppers get their hands on goods immediately, paying the purchase price in interest-free installments to a company like Afterpay, which in turn typically charges a fee to the retailer—has been on the upswing globally, thanks to growth in e-commerce and an economic slowdown brought on by the COVID-19 pandemic. 

Dublin-based Research and Markets projected its use in Canada would increase by 48.2 per cent in 2022 to reach US$9.18 billion in retail payments. The market research company expects BNPL transactions to grow at a compound annual rate of 27.5 per cent. Worldwide, it’s grown from US$33 billion in transaction volume in 2019 to US$120 billion in 2021, according to GlobalData.

For all the enthusiasm for the service—especially among young people—BNPL remains controversial. The Financial Consumer Agency of Canada (FCAC), the country’s financial consumer watchdog, has warned Canadians that they’re financing purchases with credit, and it may be an expensive way to borrow money if you miss a payment deadline. BNPL might also lead to fees, over-borrowing, bad credit and impulsive spending, the agency said.

U.S. Consumer Financial Protection Bureau (CFPB) director Rohit Chopra has compared BNPL to a credit card that incorporates infomercial-style payment plans, referencing television ads that used the language of “four easy payments” to increase sales on items like juicers and home fitness equipment. He also said BNPL has “mimicked parts of Big Tech’s surveillance model to harvest and monetize data in ways that banks and credit unions have typically avoided.”

Like its U.S. counterpart, FCAC has been looking into BNPL plans. The watchdog has been gathering information via public surveys and consumer interviews on the topic since early 2021, according to internal documents The Logic obtained through an access-to-information request. A pilot study concluded that the agency would evaluate the dispute-resolution processes for BNPL services and examine the regulatory landscape for providers operating in the country. 

The Logic’s follow-up access-to-information request for meeting summaries and communications about BNPL in Canada for most of 2022 produced 48 documents, all of which were completely redacted. 

“FCAC continues to monitor the evolution of the BNPL market in Canada and is still looking at implementing the next steps outlined in the [pilot study], which include, but are not limited to, the dispute resolution process,” FCAC spokesperson Léonie Laflamme-Savoie told The Logic. The watchdog’s role is to supervise the compliance of federally regulated financial entities, not to draft regulations themselves, she said. 

Asked what work it was doing on potential BNPL regulations, Finance Canada offered little detail. “The government continues to raise public awareness about the costs of, and alternatives to, lending products by supporting financial literacy,” said spokesperson Marie-France Faucher. 

If Canada plans to regulate BNPL, Afterpay, one of the major global players in the sector, is keen to help shape the rules. 

Afterpay hit the Canadian market in the summer of 2020 through partnerships with Canadian retailers including Roots and Herschel Supply Co. In early 2022, Block—formerly known as Square Inc.—acquired Afterpay for US$29 billion. Later that year, Square, now housed under Block, announced it would be integrating the BNPL into its payment services to help Canadian sellers appeal to more customers and bump up revenue. 

While Canadian banks like TD, BMO and RBC have also introduced instalment payment options to compete with fintechs, Afterpay’s main competitors are big international players like Sezzle, Affirm, Zip, Paypal and Klarna. Afterpay is the only BNPL-focused fintech to have made a pre-budget submission. The company declined The Logic’s request for comment.

Key to Afterpay’s argument in the submission is that its business model has the opposite incentive structure to credit cards. Afterpay doesn’t charge customers interest, even if they’re behind on their payments, the submission said, emphasizing that it earns merchant fees from  sales, not from consumer debt. 

Afterpay also touts itself as a “totally free” service that limits initial spending for new customers by setting a low limit on how much they can finance. Consumers can only increase their limit by proving they can make payments on time. If they’re tardy with their payments, Afterpay will automatically pause their accounts, the submission said. 

Afterpay has positioned itself as a positive influence compared to traditional credit cards. In a report published last year, Afterpay described BNPL as a “budgeting tool” that younger generations are using to battle rising inflation.

Sylvie De Bellefeuille, budget and legal adviser at Montreal-based Option consommateurs, a non-profit consumer advocacy group, said BNPL “is more like a spending tool than a budget tool.” Option consommateurs is currently conducting research funded by Innovation, Science and Economic Development Canada on BNPL. 

It remains to be seen whether BNPL is a safer alternative than credit cards, she said, since it can lead consumers to buy more expensive items because they don’t have to cover it in one payment.

“We don’t know all the outcomes and how it would be managed in the long run.”

De Bellefeuille added that “nothing is free … there’s always money somewhere involved.” In this case, if BNPL providers charge retailers, that expense is going to be transferred one way or another to consumers within the price of the items they buy. 

Because Afterpay accepts payments by credit card, there’s a risk to consumers of repaying debt with other debt, she said. 

This isn’t Afterpay’s first attempt to have its voice heard in Ottawa. According to the federal lobby registry, Afterpay communicated with two members of the Office of the Minister of International Trade to “build awareness over the Buy Now Pay Later (BNPL) consumer-focused business model.”

“Afterpay is attempting to encourage the creation of a regulatory model that recognizes the differences within the BNPL market, as well as the distinguishing factors between BNPL and alternative financial services offering high-cost credit,” its registration said. 

Later that month, Afterpay discussed the same subject with multiple members of FCAC.

“The conversation touched on consumer issues, consumer finance and consumer protection,” FCAC spokesperson Laflamme-Savoie said in an email. 

Whatever the federal government may do to regulate BNPL products, they may also be subject to provincial and territorial rules to protect consumers.

The Logic put questions to regulators in all ten provinces and heard from government organizations in Newfoundland and Labrador, New Brunswick, Saskatchewan and Alberta that they consider BNPL products to be credit agreements that fall under the same consumer protection acts.  

In Alberta, for instance, BNPL protections include “the right to prepay at any time with no penalty, and a prohibition on most default fees,” said Andrew Hanon, a spokesperson for Service Alberta and Red Tape Reduction. 

A spokesperson for Consumer Protection BC said it might have a “sliver of authority” with disclosures around the cost of consumer credit but doesn’t license or regulate the industry as a whole.