No money down: New financing companies are transforming online shopping by offering pay-later options for small purchases

Written by on November 20, 2020

Peter Kalen, founder and CEO of Flexiti, exterior a Sleep Nation retailer on Nov. 18, 2020.

Fred Lum/The Globe and Mail

Peter Kalen noticed one thing odd as he sifted via a pile of flyers in the future in 2011. It was a element most individuals wouldn’t discover, however to him it caught out: Not one of the mid-sized equipment retailers had been promoting zero-per-cent financing.

As an government with Sears Canada on the time, a part of Mr. Kalen’s job was to observe rivals’ adverts. He was used to seeing loads of instalment-plan presents. Incentivizing individuals to purchase on credit score was a typical advertising tactic.

It was turning into clear {that a} huge retail shift was underneath approach. The U.S. monetary providers companies that underwrote many no-money-down buy plans had been pulling out of Canada, a part of a world retrenchment after the 2008-09 monetary disaster. The remaining huge gamers – Toronto-Dominion Financial institution and Desjardins – would quickly be eyeing the exits.

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Mr. Kalen noticed a possibility.

Immediately, his Toronto firm, Flexiti Monetary Inc., is certainly one of a number of startups main a metamorphosis of the Canadian “buy-now-pay-later” house, an trade that’s rising quick all over the world. The previous instalment plans – which was once reserved for big-ticket objects akin to furnishings, home equipment and vehicles – have gone digital. Canadian corporations PayBright and Shopify, plus world manufacturers that embody Afterpay, Klarna and Sezzle, provide sooner, simpler methods for customers to purchase on credit score.

Retailers are leaping on board, and for smaller purchases than previously. It’s now widespread to see pay-by-instalment plans pop up at checkouts of on-line shops akin to Aritzia, Sephora, Softmoc and plenty of extra, enabling shoppers to unfold the price of make-up, leggings and different on a regular basis objects over weeks or months.

At a time of financial uncertainty introduced on by COVID-19, versatile fee plans could also be extra engaging to shoppers – notably in a vacation season when Canadians are anticipated to purchase extra of their presents on-line. On the identical time, client advocates worry these plans are egging on customers to purchase issues they will’t afford.

And the enterprise is increasing. Regardless of the pandemic, Flexiti’s gross sales had been up 40 per cent year-over-year in September, and doubled in October, helped by a surge in e-commerce. Mr. Kalen thinks Flexiti might attain $1-billion in loans subsequent yr.

PayBright’s funded purchases have greater than doubled in 2020, and it has doubled the variety of prospects accredited for loans to greater than 600,00Zero in Canada. Each Flexiti and PayBright have employed dozens of individuals and appeared on lists of Canada’s fastest-growing corporations this yr.

“It doesn’t occur day by day {that a} main trade adjustments arms like that as a result of for quite a lot of causes the incumbents resolve they will’t be in it,” says Wayne Pommen, chief government of Toronto-based PayBright. “And on the newer digital stuff – e-commerce, smaller [purchase amounts] – there have been no incumbents there. … It’s gotten actually broad. There are simply so many retailers which are this product now.”

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Fee by instalments has been a trick of the retail commerce for many years. A deferred-payment deal is perhaps sufficient to drag in a buyer who would in any other case want to avoid wasting for that automobile or lounge set – or to upsell them. (Why not purchase a TV to go along with that new sofa, when you will pay later?)

In fact, zero-interest financing offers don’t at all times price zero. Many of the financiers’ revenues historically got here from prospects who didn’t repay on time, and had been saddled with compounding curiosity funds.

The previous instalment mannequin had one other disadvantage: paperwork. To make the sale, retailers trusted prospects placing up with the trouble of going to a desk in a nook of the shop, manually filling out an utility and ready for a credit score test.

That buyer persistence was shaky sufficient in bricks-and-mortar shops; on-line, it’s non-existent.

That’s the place the most recent digital gamers are available. They’ve constructed their enterprise on rushing up the method, and have drawn in retailers that by no means supplied instalments earlier than.

Australian multinational Afterpay Afterpay, for instance, launched in Canada this summer time. It presents instalment plans for retailers akin to Aritzia Aritzia and low-priced clothes and accessories chain Ardene. PayBright’s buy-now-pay-later plans can be utilized to purchase make-up from Sephora and attire from Dynamite, and it simply signed on Hudson’s Bay.

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World corporations are all vying for a much bigger piece of this rising trade. Afterpay has 11.2 million lively customers and greater than doubled its revenues in its fiscal yr ended June 30 to roughly $468-million. One other main participant, Sweden’s Klarna Financial institution AB, had about 12 million month-to-month lively customers of its app by August. In 2019, Klarna’s working revenues rose greater than 30 per cent in contrast with the yr earlier than, to greater than $1-billion – however it additionally reported its first-ever loss because it aggressively expanded.

These digital upstarts are competing with bank cards by extending the interval prospects should repay a purchase order. It’s usually cheaper to enroll in a buy-now-pay-later plan than to hold a stability (and rack up curiosity) on a bank card.

Quite than sending a bank card invoice every month, a typical “pay-in-four” deal could take a preauthorized credit score or debit cost biweekly or month-to-month over 4 instalments. Different presents can string out funds longer for costlier objects akin to pill computer systems. These plans usually carry zero curiosity – somebody shopping for a $100 pair of denims for instance, makes 4 $25 funds. In the event that they pay on time, it prices nothing else. PayBright and different corporations additionally provide plans that cost some curiosity, and retailers usually use each.

In fact, some individuals don’t pay on time. For them the price is increased – simply how a lot increased, can range extensively relying on the deal. Suppliers could cost late charges, or curiosity, or each. To counter widespread critiques, many buy-now-pay-later corporations emphasize that late charges are usually not their principal income; they earn cash by charging a fee to retailers.

These retailer commissions for pay-in-four plans might be twice as excessive because the charges bank cards cost to retailers, and double once more for longer-term loans. However corporations promoting these plans to retailers emphasize that prospects who use them are inclined to spend extra – a median of 30 per cent extra on common, in response to PayBright – and are likelier to finish their purchases.

To finance its presents, PayBright has revolving credit score amenities with Canadian Western Financial institution and Equitable Financial institution for its pay-in-four plans. Loans with longer phrases are securitized via Canadian Imperial Financial institution of Commerce, which bundles them and sells the loans as business paper securities.

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Kelowna-based Pela, which sells sustainably-made telephone circumstances for $40 to $50 a pop, began providing zero-interest plans in February. Pela makes use of Minneapolis-based buy-now-pay-later agency Sezzle Sezzle Inc. Customers who select the choice spend a median of 15 per cent greater than those that don’t, mentioned Chris Fleguel, progress marketer with Pela.

“It offers them the choice to unfold the fee out – to not be in the identical month that they spent $1,00Zero on a brand new iPhone,” he mentioned.

The brand new presents are additionally proving engaging for big-ticket purchases as soon as lined underneath previous instalment plans. For instance, Samsung Canada labored with different financiers previously, and now makes use of PayBright for each its e-commerce and bodily shops.

“It’s a lot faster,” says Patricia Heath, vice chairman of retail at Samsung Canada. “That sort of effectivity, with financing, is essential.”

Competitors is heating up. Canadian e-commerce big Shopify Inc. is rolling out its personal service for its retailers, Store Pay Installments, in partnership with buy-now-pay-later firm Affirm Inc. Some bank card suppliers are getting within the sport, as properly. In 2019 CIBC started providing bank card shoppers the possibility to separate purchases into instalments. PayPal launched its personal pay-in-four plan in the USA this summer time.

World giants are additionally shifting in on Canada. Final yr, PayBright struck a deal to serve Klarna’s retail shoppers in Canada. Afterpay launched right here in August. Some are shopping for their approach in to new markets, too. Afterpay mentioned this summer time it might purchase Spain’s Pagantis SAU for €50-million (practically $78-million) to compete with Klarna in Europe. Business gamers say extra offers could also be on the horizon.

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Jess Sternberg, proprietor of e-commerce clothes retailer Free Label, at a facility the place a few of her clothes is produced in Vancouver, on Nov. 20, 2020.

DARRYL DYCK/The Globe and Mail

The trade appeared very totally different when Peter Kalen left Sears Canada to begin Flexiti in mid-2013. E-commerce was a a lot smaller a part of retail gross sales than it’s now, and Flexiti began out simply making an attempt to hurry up the cumbersome in-store financing course of with digital functions.

By July 2014, Flexiti started approaching retailers. Over the subsequent 4 years, it signed up 1,200 areas, together with Spence Diamonds and Unhealthy Boy Furnishings. Its aim was to fill a rising hole available in the market.

When Toronto-Dominion exited the retail finance enterprise in 2018, it bought its non-public label bank card portfolio to Flexiti for $250-million. That deal, backed by a $50-million fairness funding from Anthony Lacavera’s Globalive Capital Inc. and a $350-million credit score facility led by Credit score Suisse, immediately made Flexiti certainly one of Canada’s largest monetary expertise gamers. Flexiti gained entry to 1 million-plus cardholders in Canada who had been prospects of outlets akin to La-Z-Boy and Birks. By 2019, Flexiti’s income reached $50-million.

This previous Could, Desjardins, which was the most important participant in Canadian in-store financing, started winding down its operation. The Quebec credit score union determined it most popular to assist its prospects handle their credit score, slightly than promote them extra of it – which it says “is not in line with this goal.” Most former Desjardins shopper retailers whose contracts have expired, together with Staples and Sleep Nation, have gone to Flexiti. By charging in as others retreated, Flexiti has develop into Canada’s dominant in-store instalment credit score supplier.

Flexiti has extra in widespread with the previous instalment plans than newer buy-now-pay-later gamers: It funds bigger-ticket purchases, sometimes issuing bodily bank cards (both Flexiti playing cards or ones co-branded with retailers), drawing on exterior credit score amenities to pay retailers up entrance. It prices decrease service provider charges for normal purchases on its playing cards than the 1.5 per cent to 2 per cent that the large bank card corporations sometimes extract. However when retailers present no-money-down presents with longer fee phrases, these charges can rise to as a lot as 14 per cent.

In contrast to different pay-later suppliers, Flexiti makes most of its income – about two-thirds – from curiosity charged to the minority of its prospects who don’t repay their loans on time.

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Its efforts to digitize and streamline the method have gained over many retailers accustomed to the previous instalment plans.

Montreal-based furnishings chain Mobilia, an ex-Desjardins buyer, started providing Flexiti’s zero-per-cent in shops this yr. As the brand new buy-now-pay-later development has accelerated, Mobilia president Johannes Kau mentioned the share of gross sales financed via instalments has nearly doubled, to 20 per cent, which he attributes to the sooner utility course of.

“In case your checkout course of is just too difficult and it takes too lengthy to do the financing, you’re going to lose the client,” Mr. Kau mentioned.

Mobilia has used PayBright for e-commerce as properly, and plans to combine Flexiti into its on-line gross sales. “It was nearly unthinkable to have a web based financing program 5 or 6 years in the past,” Mr. Kau mentioned. “The expertise wasn’t there, and the suppliers weren’t there.”

They’re now. Like Flexiti, PayBright was fashioned out of the ashes of the 2008-09 recession. It began out underneath one other identify in 2009, offering point-of-sale lending for well being care suppliers akin to dentists and veterinarians.

Mr. Pommen, beforehand a private-equity financier, purchased into the corporate in 2015. Underneath the brand new PayBright model, the corporate expanded to the broader retail market, with a concentrate on e-commerce – although it additionally gives in-store fee plans. It has since raised $60-million from Goeasy Ltd., Industrial Alliance Insurance coverage and Monetary Companies Inc., and the Canada Enterprise Development Fund.

The “secret sauce” of the enterprise is that as a result of retailers promote these plans to customers, the price of buying new prospects is low, Mr. Pommen mentioned. As e-commerce took off throughout the pandemic, demand grew: PayBright’s buy volumes are up 110 per cent this yr. At Flexiti, financing for e-commerce transactions has risen by about 600 per cent.

“When individuals are feeling tight throughout a recession, interest-free instalments – that are a majority of our enterprise – are a extremely popular software,” Mr. Pommen mentioned.

EBay Canada started providing instalments through PayBright final yr for purchases over $200. Its retailers can select zero-interest or interest-bearing presents. Like Flexiti’s Mr. Kalen, eBay Canada normal supervisor Robert Bigler used to work at Sears Canada – and has been struck by how a lot less complicated and faster the brand new buy-now-pay-later gamers have made the method.

“On-line, all of it comes right down to simplicity,” Mr. Bigler mentioned. “That last hurdle within the decision-making course of for the buyer, the place they is perhaps hesitating – by providing simple credit score, it drives a sale.”

However is quicker and simpler entry to credit score a superb factor at a time when the nation is within the worst recession in generations? The rise of this new class of financiers has some private finance specialists nervous.

The Higher Enterprise Bureau lately posted an article cautioning individuals to learn the positive print earlier than signing up for buy-now-pay-later plans, to make sure they perceive such dangers because the potential influence on their credit score rankings and penalties for lacking funds. The BBB is anxious these packages attraction to younger customers who lack expertise managing debt.

Like bank cards, these instalment plans are usually not inherently a foul thought, mentioned Patrick McKeen, president and CEO of the BBB in Central Ontario – however they are often, if prospects don’t use them prudently.

Choices from the likes of Afterpay and PayBright are “very interesting, as a result of it doesn’t really feel like debt in the identical approach,” mentioned Liz Schieck, an authorized monetary planner with the agency New Faculty of Finance. “It masquerades a bit like budgeting, prefer it’s no huge deal … [but] it simply encourages individuals to spend extra.”

Not all retailers are enthusiastic, both. Jess Sternberg, proprietor of Vancouver-based e-commerce clothes retailer Free Label, lately determined to not provide buy-now-pay-later plans.

“It felt to me like a faux answer to a much bigger downside … to low incomes, and to earnings disparity,” Ms. Sternberg mentioned. Free Label advertises itself as an moral model with domestically manufactured merchandise, she added. Encouraging what she calls “un-conscious consumption” didn’t appear to be a superb match.

“Why is the dialog centered on having anyone buy one thing that’s exterior of their means?” she mentioned. “A lot strain in advertising is coming from manufacturers saying, ‘You want this.’ … If we are literally taught monetary literacy – funds and save – we will make extra considerate purchases.”

However the brand new financiers argue that the majority customers use their merchandise responsibly, and say they haven’t seen a spike in delinquencies this yr. With shoppers spending much less on journey and eating, they’re responsibly repaying their money owed, Flexiti’s Mr. Kalen mentioned. “The Canadian client continues to exhibit a level of prudence of their spending that offers us a excessive diploma of consolation.”

PayBright stopped charging late charges in March to offer prospects some aid throughout the pandemic. However the quantity of its unpaid loans – sometimes 2 per cent to three per cent of the full – has not elevated. Firms akin to PayBright and Afterpay additionally cap how a lot debt individuals can rack up with them: A buyer who misses a fee can’t finance extra purchases till the difficulty is resolved.

Nonetheless, the enlargement of financing choices “is unquestionably trigger for concern,” mentioned Keith Emery, chief working officer of Credit score Canada Debt Options, a bank-funded group that promotes monetary literacy.

Younger shoppers signing up for a number of instalment plans might lose observe of what they owe – and to whom – including a “worrying” stage of complexity to their credit score profile, Mr. Emery mentioned. With many younger individuals working within the gig economic system, freelancing or blindsided by COVID-related layoffs, “fluctuating earnings [paired] with fluctuating debt funds is a really harmful state of affairs,” he mentioned.

PayBright’s Mr. Pommen counters that buy-now-pay-later companies are not any extra culpable than credit-card suppliers for encouraging unnecessary spending. Plus, many provide “far friendlier phrases” than bank cards with “no additional prices,” he mentioned, making it clear from the beginning how a lot customers will owe.

“Our product is designed to have individuals pay it off on time via preauthorized debits [unlike credit card providers that] hope that you just don’t make your funds on time, to allow them to earn compounding curiosity,” Mr. Pommen mentioned.

When there are issues, nevertheless, some shoppers have reported issue contacting the financiers to resolve the matter. Mr. Pommen admits he made “an unlimited mistake” by freezing hiring early within the pandemic, and spent the summer time catching up. Flexiti acknowledges it had some “administrative challenges” after introducing new processes to facilitate a fee aid program throughout the pandemic, which resulted in increased name volumes and longer wait instances.

Whatever the considerations, the buy-now-pay-later sector is rising quick. Mr. Kalen expects Flexiti will go public within the coming years, and push additional into e-commerce financing.

The sector is attracting renewed curiosity from monetary providers giants. “We’ve have vital acquisition curiosity already from U.S. and overseas gamers, and a little bit of door-knocking from home gamers,” Mr. Pommen mentioned. Extra retailers are additionally approaching board. PayBright now companions with greater than 7,00Zero retailers, up greater than 50 per cent previously yr.

“COVID accelerated it,” he mentioned. “Retailers are saying, ‘E-commerce is a very essential precedence. And we’d like all of the gross sales instruments that we will get.’ ”


These are simply a number of the manufacturers vying for a chunk of this rising enterprise – in Canada and all over the world.


Klarna Financial institution AB

Based 2005; non-public

HQ: Stockholm

Retailers: 200,000+

Prospects: 12 million month-to-month lively app customers

Markets: 17 international locations together with the USA, Britain, Sweden, Germany, Australia; partnership with PayBright in Canada


Affirm Holdings, Inc.

Based 2012; non-public, filed for IPO on Nov. 18

HQ: San Francisco

Retailers: 6,500

Prospects: 6.2 million

Markets: U.S. and Canada


Afterpay Ltd.

Based 2014; in means of buying Pagantis; public

HQ: Melbourne, Australia

Retailers: 55,000+

Prospects: 11 million+

Markets: Australia, New Zealand, U.S., Canada, Singapore; Pagantis in Spain, France, Italy


Zip Co Ltd.

Based 2013, acquired QuadPay (based 2017) this yr; public

HQ: Sydney, Australia

Retailers: 34,400

Prospects: 4.5 million

Markets: Australia, New Zealand, U.S., Britain, South Africa


Sezzle Inc.

Based 2016; public

HQ: Minneapolis, Minn.

Retailers: 20,000+ within the U.S. and Canada

Prospects: practically 1.8-million

Markets: U.S., Canada, India


Based 2009; non-public

HQ: Toronto

Retailers: 7,000+

Prospects: 600,000+

Market: Canada


Flexiti Monetary Inc.

Based 2013; non-public

HQ: Toronto

Retailers: 5,000+ areas

Prospects: 1.three million

Market: Canada

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