A $40 sweater in 4 installments

A $40 sweater in 4 installments

While many Quebecers live paycheck to paycheck, credit card issuers are relying on the new “buy now, pay later” formula to encourage consumers to buy more.

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“Pay in six weeks, without interest. No external credit checks, no interest, no surprises, and our customers love it”, boasts the site of Afterpay, an online deferred payment platform.

We knew of payment agreements spread over several months to buy a sofa or a washing machine. But in recent years, the formula has been developing on the internet. Now you can buy a piece of furniture, but also a sweater for $40 and pay for it in four installments, from thousands of online merchants, in just a few clicks, without an extensive credit check or paperwork.

This payment method came from the United States, before the pandemic, through fintechsince start up financial technologies.

$50 billion

Since then, the market has grown. Installment payment adoption in Canada grew 30% in 2020 and the market is expected to reach $50 billion per year, according to data from Visa. However, for each payment in deferred installments, the finance company charges a percentage of the invoiced amount. Therefore, the market is juicy.

“I was wondering why credit cards don’t launch and leave those fintech eat the wool from their backs? says Jeffrey Giasson, vice president. Soft Moc Finance, a shoe brand that offers installment payments.

Finally, it is the credit card issuers turn to start. After making a first deal with Desjardins in 2021, Visa announced new partnerships earlier this week.

In a few months, it will be possible to opt for deferred payment directly at the checkout at retailers such as Simons or Soft Moc.

The latter, owner of a dozen shoe stores in Quebec, already offered this type of online method to “respond to the desire of a young population, who lives from payroll to payroll and who wants to buy an item without being able to pay all at once”. .

Sales increase

Initially skeptical, Mr Giasson says he was impressed with the results. The ability to spread payments has increased sales.

The same observation in a Quebec SME that sells remote control vehicles and recently implemented the option. “We have seen an increase in sales of at least 10% thanks to [aux paiements différés], assures Chantal Mélançon, general manager of QTM. Encourage the customer to buy. »

In fact, a report on new payment methods from Deutsche Bank confirms that the process encourages people to spend more. Nearly half of customers (46%) who use the “Buy Now, Pay Later” payment option at checkout would not have made a purchase without it.

“Another trap set for us”

If the “Buy now, pay later” formula can be accommodating, it can also encourage excessive consumption and accelerate the indebtedness of many consumers.

“This makes credit very accessible,” underlines Sylvain Sénécal, professor at HEC Montréal. According to him, the formula can be useful for certain purchases, products that we really need, but for which we lack funds and we will be able to distribute the payments.

But “it can also be something more impulsive,” he explains. If I want my eighth pair of shoes, in a different color, they are very attractive, and they offer me to pay for them gradually… Overconsumption is no stranger to that”.

“Creating false needs”

Youcef Ghellach, founder of the site educfinance.ca, is concerned about these practices. “Saying ‘no interest’ encourages people to create false needs,” says the finance and accounting professor. This is another trap set for us. The main objective is to increase the income of the business. »

Whether the purchase is essential or impulsive, the risk of not perceiving the impact of these purchases on our budget is significant, since we only pay a small part of the amount immediately. Even if the term is postponed, these expenses will have to be paid later.

“There are people who end up using the credit to pay the deferred payment,” says Ghellach. He advises planning your purchases, saving as much as possible to cover your expenses and avoiding impulse purchases.

different rates

When it comes to how buy now, pay later offers work, they differ by merchant and payment method.

Online offers are mostly without interest, but in case of non-payment of installments, charges can reach in some cases up to 25% of the amount purchased.

At some merchants like Soft Moc, we will offer a more classic interest rate. If you do not pay each installment when due, penalties are applied to the credit card.

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