The hot new shopping trend this holiday season is not about what consumers buy, but rather how they pay.

Buy Now Pay Later (BNPL) is a catchall term for a new form of credit, emerging as an alternative to credit cards and debit cards, primarily for online transactions. A number of international providers are making inroads in Canada as consumers react positively to the combination of instant gratification and postponed consequences promised by the Buy Now, Pay Later nomenclature, the delayed repayments through periodic instalments, and the promise of no interest during the interim.

But those two key elements – the expanded credit, and the lack of interest – pose challenges to consumer protection authorities and policymakers.

In other nations where BNPL has a longer track record, the expansion of credit harms some consumers. A 2020 study by Australia’s Securities & Investment Commission found that one in five BNPL consumers miss payments, and one in six had either become overdrawn at their bank, delayed bill payments or borrowed additional funds because of a BNPL arrangement. British research found that the average balance is more than C$910, nearly half of customers (45%) admit to falling behind on payments and the government is starting consultations about regulating the sector.

In Canada, most major BNPL providers require that instalment payments be pre-authorized charges against the customer’s credit or debit cards. Most providers also suspend future purchase privileges if a schedule repayment is missed. And there are late fees for missed purchases.

But the more acute problem for all consumers – and policymakers – is created by the BNPL revenue model. With no interest during repayment periods, and modest late fee charges, the BNPL providers generate their revenue by charging merchants high rates, much higher than for premium credit cards.

The costs to businesses of accepting premium credit cards have led to many years of complaints from merchants. The Department of Finance completed a public consultation on how to reduce credit card transaction fees, with next steps to be detailed in the Fall Economic Statement.

The sudden rise of BNPL payments, with merchant fees of 3.5% or higher, runs headlong into those credit card initiatives to lower merchant costs. In addition, BNPL providers tend to target younger credit-averse shoppers, so even though it is a credit-based product, it is often used as a substitute for debit purchases, which are much less costly for merchants.

So while some merchants bemoan the high costs of credit card transactions, other merchants willingly accept the more costly BNPL transactions because the average purchase tends to be large, and because it reduces the number of abandoned online transactions. The relationship between merchant transaction fees and credit card loyalty programs was examined in a 2015 Consumers Council of Canada report.

The higher transaction fees, coupled with an inability or reluctance to surcharge for payment choices means merchants must absorb those costs and spread them among all consumers.

So while BNPL customers can buy now, in some ways, all consumers will pay later.