Buy Now, Pay Later

Objectives

• Describe the risks involved in using credit.
• Name the main types of credit contracts.
• Indicate the information that must appear on credit contracts.
• Indicate certain rights and responsibilities of consumers who enter into a variable credit contract.

Description

Students engage in a classroom discussion of “Buy Now, Pay Later” services and answer questions on the subject. They then put together the list of drawbacks and benefits for consumers when they use these services to make their purchases.

Equipment

• Interactive whiteboard (IWB) or projector
• Slide show (True or False questions)

Introduction

To initiate this activity, the teacher leads a classroom discussion by asking students the following questions.

Q.  Are you familiar with companies such as Sezzle, PayBright, Flexiti, Afterpay, Affirm or Klarna? If so, what type of service to they offer?

R.  Personal replies. These companies offer “Buy Now, Pay Later” financing services.

Q.  What do you know about “Buy Now, Pay Later” services?

R.  Potential replies: an increasingly popular service and offered everywhere; a payment solution that allows consumers to purchase an item on credit; a financing plan that lets consumers buy an item on the spot and stagger payments over a given period; can be equally used to purchase an expensive $1,000 item or make a small $15 purchase; often presented for online purchases, etc.

Q.  Where are these services offered to consumers? 

R.  At checkout in many stores or when making payment for an online purchase.

Q.  Have you ever used “Buy Now, Pay Later” services to make a purchase? 

R.  Personal replies.

The teacher goes on to ask a series of True or False? questions about “Buy Now, Pay Later” services. The teacher can ask the questions aloud or use the slide show on the IWB. The explanations provided below may be used to complete the replies.

True or False?

Q.  “Buy Now, Pay Later” services can only be used for purchases of more than $50.

R.  False.

Explanation: These services can be used even for small purchases, e.g., a $20 sweater or a $13 beauty product.

Q.  There is no minimum age requirement to use a “Buy Now, Pay Later” service.

R.  False.

Explanation: You have to be 18 years old or older to use this type of service.

Q.  Customers of merchants that offer a “Buy Now, Pay Later” option generally spend up to 50% more per transaction.

R.  True.

Explanation: According to RBC Capital Markets, a global investment bank, a “Buy Now, Pay Later” option bumps the amount of the transaction up by 30% to 50% because the consumer can end up purchasing more goods than expected. In addition, it increases the chances of the buyer going through checkout by 20% to 30%.[1]

Q.  Regardless of which business is offering a “Buy Now, Pay Later” service, the terms and conditions are the same.

R.  False.

Explanation: Businesses that offer deferred payment options are still relatively new. Although they share several points in common, they are also different in many ways, in particular when it comes to the consumer’s credit file. For example, most providers of these types of options do not check the consumer’s credit, or they only do a surface check, which does not affect the credit file. However, others report default of payment cases to the principal credit rating agencies. [2]

Q.  “Buy Now, Pay Later” services are very popular with young people.

R.  True.

Explanation: According to a pilot study by the Financial Consumer Agency of Canada, young people between the ages of 18 and 34 appear more likely to have used an online “Buy Now, Pay Later” service.[3]

Explanations

Using the text presented below, the teacher provides a definition of “Buy Now, Pay Later” services and explains how they work to the students.

How do “Buy Now, Pay Later” services work?

“Buy Now, Pay Later” is a payment solution that allows individuals to purchase goods on credit. Consumers can purchase an item on the spot and stagger the payments, sometimes called micropayments, over a given period such as a certain number of weeks or months. In some cases, this may be offered in the form of a credit contract, such as a loan of money or an instalment sale contract.

Traditionally, this deferred payment method was reserved for big-ticket items, such as household appliances, and consumers were required to go through a lengthy in-store credit application process. It is now almost instantly accessible online, for much less expensive purchases, and for a very broad range of products and services, such as apparel, cosmetics and entertainment. 

An increasing number of brand-name companies are joining forces with financial technology companies to offer these financing plans. These companies receive commissions paid by the merchants to generate profits, which most often correspond to a percentage of the value of the transactions.

The main deferred payment companies are PayBright, Afterpay and Sezzle. Some financial institutions have now started to offer these types of services.

The offerings are varied and differ from one provider and one store to another, as are the terms and conditions and applicable interest rates. Depending on the company, consumers can choose to link monthly payments to a bank account, a debit card or a credit card.

Depending on the platform used, penalties or high interest can be charged if the consumer fails to meet the reimbursement deadlines. In fact, some companies make a portal or application available to reschedule or change the amount of the payments as needed.

When an individual subscribes to this type of service, if it involves a credit contract, the law requires that the company provide the consumer with certain information, in particular regarding payments, their deadlines, terms and conditions, and interest.

Instructions

In teams of 3 or 4, students put together a list (on a sheet of lined paper) of the drawbacks and benefits for consumers when they use a “Buy Now, Pay Later” service to make a purchase.

To build their arguments, students can consult the many articles on the subject available online.

In a full-class session, the teacher reviews the exercise and asks the teams to share their arguments with the rest of the class. The following elements should be mentioned.

Drawbacks

Benefits

Encourages spending, can lead to impulse buying and creates false needs, as the perception of small payments staggered over time creates the impression that the desired item is not expensive and that we have greater purchasing power than we really have. Provides too easy access to credit, even if the consumer has a poor credit rating, as the approval criteria are often less strict than for traditional credit. Increases the risk of losing track of expenses, especially when several deferred payment services are used at the same time and purchases have started building up. Pushes the consumer into debt and debt overload, as this can lead consumers to spend over what they can actually afford and spend more money than they earn. Can generate reimbursement difficulties for the consumer whose income is decreasing. Interest or additional fees are sometimes added and can quickly increase if the consumer defaults on payment. Can create problems in cases where the item is returned, as the consumer may be stuck with payments to make, regardless of whether he or she received a reimbursement from the merchant. Can, in certain cases, negatively affect a consumer’s credit file if he or she defaults on payment.

Allows consumers to purchase an item now and pay for it in instalments, over a period that fits their budget. Provides a less costly option than credit cards or other credit offerings that have higher interest rates. Provides access to credit at often very low or even 0% interest rates, if the payments are made by the deadlines. Requires no membership fees from the consumer, as most of these services charge user fees to the retailer rather than the consumer. Provides access to a practical payment process that allows consumers to make small payments that are easier to absorb. Can be advantageous for the purchase of an essential and expensive item, especially for an urgent and unplanned expense (e.g., buying a new fridge to replace the one that just died). Can lighten the financial burden in certain periods when expenses are higher, such as during the Holiday season. Does not affect the consumer’s credit file, in most cases.

Conclusion

The teacher concludes the activity by leading a full-class discussion. The teacher asks the students to draw up a list of advice or things to think about they would share with a friend who wants to use a “Buy Now, Pay Later” solution.

The following elements should be mentioned.

• Evaluate the need to make the purchase: Do you really need this item? Why do you have to buy it now? Is this something you really need or is it just something you want?
• Make sure each of your purchases fits into your budget.
• Make sure you have the discipline required to pay off the balance before the due date.
• Find out about the general terms and conditions to use the service to know, among other things, what the penalties are if you default on payment.
• Determine whether you can afford to pay the interest or fees if you miss a payment or if you are unable to pay off the balance before the due date.
• Evaluate the effect of the plan on your projects. You have to make absolutely sure that the purchase does not get in the way of your savings goals or a special project (e.g., a school trip).
• Before you accept a “Buy Now, Pay Later” offer, ask yourself the following question: Can you afford to make the purchase today? If the answer is no, but you make the purchase anyway, you are just kicking the problem down the road by putting yourself in a situation where you will have no choice but to save a certain amount of money by a specific date.

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