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Peter Kalen, founder and CEO of Flexiti, outside a Sleep Country store on Nov. 18, 2020.Fred Lum/The Globe and Mail

Peter Kalen spotted something odd as he sifted through a pile of flyers one day in 2011. It was a detail most people wouldn’t notice, but to him it stuck out: None of the mid-sized appliance retailers were advertising zero-per-cent financing.

As an executive with Sears Canada at the time, part of Mr. Kalen’s job was to monitor rivals’ ads. He was used to seeing plenty of instalment-plan offers. Incentivizing people to buy on credit was a common marketing tactic.

It was becoming clear that a big retail shift was under way. The U.S. financial services firms that underwrote many no-money-down purchase plans had been pulling out of Canada, part of a global retrenchment after the 2008-09 financial crisis. The remaining big players – Toronto-Dominion Bank and Desjardins – would soon be eyeing the exits.

Mr. Kalen saw an opportunity.

Today, his Toronto company, Flexiti Financial Inc., is one of several startups leading a transformation of the Canadian “buy-now-pay-later” space, an industry that is growing fast around the world. The old instalment plans – which used to be reserved for big-ticket items such as furniture, appliances and cars – have gone digital. Canadian companies PayBright and Shopify, plus global brands that include Afterpay, Klarna and Sezzle, offer faster, easier ways for shoppers to buy on credit.

Retailers are jumping on board, and for smaller purchases than in the past. It is now common to see pay-by-instalment plans pop up at checkouts of online stores such as Aritzia, Sephora, Softmoc and many more, enabling consumers to spread the cost of makeup, leggings and other everyday items over weeks or months.

At a time of economic uncertainty brought on by COVID-19, flexible payment plans may be more attractive to consumers – particularly in a holiday season when Canadians are expected to buy more of their gifts online. At the same time, consumer advocates fear these plans are egging on shoppers to buy things they can’t afford.

And the business is expanding. Despite the pandemic, Flexiti’s sales were up 40 per cent year-over-year in September, and doubled in October, helped by a surge in e-commerce. Mr. Kalen thinks Flexiti could reach $1-billion in loans next year.

PayBright’s funded purchases have more than doubled in 2020, and it has doubled the number of customers approved for loans to more than 600,000 in Canada. Both Flexiti and PayBright have hired dozens of people and appeared on lists of Canada’s fastest-growing companies this year.

“It doesn’t happen every day that a major industry changes hands like that because for a variety of reasons the incumbents decide they can’t be in it,” says Wayne Pommen, chief executive of Toronto-based PayBright. “And on the newer digital stuff – e-commerce, smaller [purchase amounts] – there were no incumbents there. … It’s gotten really broad. There are just so many retailers that are looking at this product now.”

Payment by instalments has been a trick of the retail trade for decades. A deferred-payment deal might be enough to pull in a customer who would otherwise need to save for that car or living room set – or to upsell them. (Why not buy a TV to go with that new couch, if you can pay later?)

Of course, zero-interest financing deals don’t always cost zero. Most of the financiers’ revenues traditionally came from customers who didn’t repay on time, and were saddled with compounding interest payments.

The old instalment model had another drawback: paperwork. To make the sale, retailers depended on customers putting up with the hassle of going to a desk in a corner of the store, manually filling out an application and waiting for a credit check.

That customer patience was shaky enough in bricks-and-mortar stores; online, it’s non-existent.

That’s where the latest digital players come in. They’ve built their business on speeding up the process, and have drawn in retailers that never offered instalments before.

Australian multinational Afterpay Afterpay, for example, launched in Canada this summer. It offers instalment plans for retailers such as Aritzia Aritzia and low-priced clothing and accessories chain Ardene. PayBright’s buy-now-pay-later plans can be used to buy makeup from Sephora and apparel from Dynamite, and it just signed on Hudson’s Bay.

Global companies are all vying for a bigger piece of this growing industry. Afterpay has 11.2 million active users and more than doubled its revenues in its fiscal year ended June 30 to roughly $468-million. Another leading player, Sweden’s Klarna Bank AB, had about 12 million monthly active users of its app by August. In 2019, Klarna’s operating revenues rose more than 30 per cent compared with the year before, to more than $1-billion – but it also reported its first-ever loss as it aggressively expanded.

These digital upstarts are competing with credit cards by extending the period customers have to pay off a purchase. It is often cheaper to sign up for a buy-now-pay-later plan than to carry a balance (and rack up interest) on a credit card.

Rather than sending a credit card bill each month, a typical “pay-in-four” deal may take a preauthorized credit or debit charge biweekly or monthly over four instalments. Other offers can string out payments longer for more expensive items such as tablet computers. These plans often carry zero interest – someone buying a $100 pair of jeans for example, makes four $25 payments. If they pay on time, it costs nothing else. PayBright and other companies also offer plans that charge some interest, and retailers often use both.

Of course, some people don’t pay on time. For them the cost is higher – just how much higher, can vary widely depending on the deal. Providers may charge late fees, or interest, or both. To counter common critiques, many buy-now-pay-later companies emphasize that late fees are not their main source of revenue; they make money by charging a commission to retailers.

Those retailer commissions for pay-in-four plans can be twice as high as the fees credit cards charge to merchants, and double again for longer-term loans. But companies selling these plans to retailers emphasize that customers who use them tend to spend more – an average of 30 per cent more on average, according to PayBright – and are likelier to complete their purchases.

To finance its offers, PayBright has revolving credit facilities with Canadian Western Bank and Equitable Bank for its pay-in-four plans. Loans with longer terms are securitized through Canadian Imperial Bank of Commerce, which bundles them and sells the loans as commercial paper securities.

Kelowna-based Pela, which sells sustainably-made phone cases for $40 to $50 a pop, started offering zero-interest plans in February. Pela uses Minneapolis-based buy-now-pay-later firm Sezzle Sezzle Inc. Shoppers who choose the option spend an average of 15 per cent more than those who don’t, said Chris Fleguel, growth marketer with Pela.

“It gives them the option to spread the payment out – to not be in the same month that they spent $1,000 on a new iPhone,” he said.

The new offers are also proving attractive for big-ticket purchases once covered under old instalment plans. For example, Samsung Canada worked with other financiers in the past, and now uses PayBright for both its e-commerce and physical stores.

“It’s much quicker,” says Patricia Heath, vice president of retail at Samsung Canada. “That kind of efficiency, with financing, is crucial.”

Competition is heating up. Canadian e-commerce giant Shopify Inc. is rolling out its own service for its merchants, Shop Pay Installments, in partnership with buy-now-pay-later company Affirm Inc. Some credit card providers are getting in the game, as well. In 2019 CIBC began offering credit card clients the chance to split purchases into instalments. PayPal launched its own pay-in-four plan in the United States this summer.

Global giants are also moving in on Canada. Last year, PayBright struck a deal to serve Klarna’s retail clients in Canada. Afterpay launched here in August. Some are buying their way in to new markets, too. Afterpay said this summer it would buy Spain’s Pagantis SAU for €50-million (nearly $78-million) to compete with Klarna in Europe. Industry players say more deals may be on the horizon.

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Jess Sternberg, owner of e-commerce clothing retailer Free Label, at a facility where some of her clothing is produced in Vancouver, on Nov. 20, 2020.DARRYL DYCK/The Globe and Mail

The industry looked very different when Peter Kalen left Sears Canada to start Flexiti in mid-2013. E-commerce was a much smaller part of retail sales than it is now, and Flexiti started out just trying to speed up the cumbersome in-store financing process with digital applications.

By July 2014, Flexiti began approaching retailers. Over the next four years, it signed up 1,200 locations, including Spence Diamonds and Bad Boy Furniture. Its goal was to fill a growing gap in the market.

When Toronto-Dominion exited the retail finance business in 2018, it sold its private label credit card portfolio to Flexiti for $250-million. That deal, backed by a $50-million equity investment from Anthony Lacavera’s Globalive Capital Inc. and a $350-million credit facility led by Credit Suisse, instantly made Flexiti one of Canada’s largest financial technology players. Flexiti gained access to one million-plus cardholders in Canada who were customers of retailers such as La-Z-Boy and Birks. By 2019, Flexiti’s revenue reached $50-million.

This past May, Desjardins, which was the largest player in Canadian in-store financing, began winding down its operation. The Quebec credit union decided it preferred to help its customers manage their credit, rather than sell them more of it – which it says “is not in line with this goal.” Most former Desjardins client retailers whose contracts have expired, including Staples and Sleep Country, have gone to Flexiti. By charging in as others retreated, Flexiti has become Canada’s dominant in-store instalment credit provider.

Flexiti has more in common with the old instalment plans than newer buy-now-pay-later players: It finances bigger-ticket purchases, typically issuing physical credit cards (either Flexiti cards or ones co-branded with retailers), drawing on outside credit facilities to pay retailers up front. It charges lower merchant fees for regular purchases on its cards than the 1.5 per cent to 2 per cent that the big credit card companies typically extract. But when retailers provide no-money-down offers with longer payment terms, those fees can rise to as much as 14 per cent.

Unlike other pay-later providers, Flexiti makes most of its revenue – about two-thirds – from interest charged to the minority of its customers who don’t pay off their loans on time.

Its efforts to digitize and streamline the process have won over many retailers accustomed to the old instalment plans.

Montreal-based furniture chain Mobilia, an ex-Desjardins customer, began offering Flexiti’s zero-per-cent in stores this year. As the new buy-now-pay-later trend has accelerated, Mobilia president Johannes Kau said the share of sales financed through instalments has almost doubled, to 20 per cent, which he attributes to the faster application process.

“If your checkout process is too complicated and it takes too long to do the financing, you’re going to lose the customer,” Mr. Kau said.

Mobilia has used PayBright for e-commerce as well, and plans to integrate Flexiti into its online sales. “It was almost unthinkable to have an online financing program five or six years ago,” Mr. Kau said. “The technology wasn’t there, and the providers weren’t there.”

They are now. Like Flexiti, PayBright was formed out of the ashes of the 2008-09 recession. It started out under another name in 2009, providing point-of-sale lending for health care providers such as dentists and veterinarians.

Mr. Pommen, previously a private-equity financier, bought into the company in 2015. Under the new PayBright brand, the company expanded to the wider retail market, with a focus on e-commerce – though it also provides in-store payment plans. It has since raised $60-million from Goeasy Ltd., Industrial Alliance Insurance and Financial Services Inc., and the Canadian Business Growth Fund.

The “secret sauce” of the business is that because retailers promote these plans to shoppers, the cost of acquiring new customers is low, Mr. Pommen said. As e-commerce took off during the pandemic, demand grew: PayBright’s purchase volumes are up 110 per cent this year. At Flexiti, financing for e-commerce transactions has risen by about 600 per cent.

“When people are feeling tight during a recession, interest-free instalments – which are a majority of our business – are a very popular tool,” Mr. Pommen said.

EBay Canada began offering instalments via PayBright last year for purchases over $200. Its merchants can choose zero-interest or interest-bearing offers. Like Flexiti’s Mr. Kalen, eBay Canada general manager Robert Bigler used to work at Sears Canada – and has been struck by how much simpler and quicker the new buy-now-pay-later players have made the process.

“Online, it all comes down to simplicity,” Mr. Bigler said. “That final hurdle in the decision-making process for the consumer, where they might be hesitating – by offering easy credit, it drives a sale.”

But is faster and easier access to credit a good thing at a time when the country is in the worst recession in generations? The rise of this new class of financiers has some personal finance specialists worried.

The Better Business Bureau recently posted an article cautioning people to read the fine print before signing up for buy-now-pay-later plans, to ensure they understand such risks as the potential impact on their credit ratings and penalties for missing payments. The BBB is concerned these programs appeal to young shoppers who lack experience managing debt.

Like credit cards, these instalment plans are not inherently a bad idea, said Patrick McKeen, president and CEO of the BBB in Central Ontario – but they can be, if customers don’t use them prudently.

Offerings from the likes of Afterpay and PayBright are “very appealing, because it doesn’t feel like debt in the same way,” said Liz Schieck, a certified financial planner with the firm New School of Finance. “It masquerades a bit like budgeting, like it’s no big deal … [but] it just encourages people to spend more.”

Not all retailers are enthusiastic, either. Jess Sternberg, owner of Vancouver-based e-commerce clothing retailer Free Label, recently decided not to offer buy-now-pay-later plans.

“It felt to me like a fake solution to a bigger problem … to low incomes, and to income disparity,” Ms. Sternberg said. Free Label advertises itself as an ethical brand with locally manufactured products, she added. Encouraging what she calls “un-conscious consumption” did not seem like a good fit.

“Why is the conversation focused on having somebody purchase something that is outside of their means?” she said. “So much pressure in marketing is coming from brands saying, ‘You need this.’ … If we are actually taught financial literacy – how to budget and how to save – we can make more thoughtful purchases.”

But the new financiers argue that most shoppers use their products responsibly, and say they have not seen a spike in delinquencies this year. With consumers spending less on travel and dining, they’re responsibly repaying their debts, Flexiti’s Mr. Kalen said. “The Canadian consumer continues to exhibit a degree of prudence in their spending that gives us a high degree of comfort.”

PayBright stopped charging late fees in March to give customers some relief during the pandemic. But the amount of its unpaid loans – typically 2 per cent to 3 per cent of the total – has not increased. Companies such as PayBright and Afterpay also cap how much debt people can rack up with them: A customer who misses a payment cannot finance more purchases until the issue is resolved.

Still, the expansion of financing options “is definitely cause for concern,” said Keith Emery, chief operating officer of Credit Canada Debt Solutions, a bank-funded organization that promotes financial literacy.

Young consumers signing up for several instalment plans could lose track of what they owe – and to whom – adding a “worrying” level of complexity to their credit profile, Mr. Emery said. With many young people working in the gig economy, freelancing or blindsided by COVID-related layoffs, “fluctuating income [paired] with fluctuating debt payments is a very dangerous situation,” he said.

PayBright’s Mr. Pommen counters that buy-now-pay-later firms are no more culpable than credit-card providers for encouraging needless spending. Plus, many offer “far friendlier terms” than credit cards with “no extra charges,” he said, making it clear from the start how much shoppers will owe.

“Our product is designed to have people pay it off on time through preauthorized debits [unlike credit card providers that] hope that you don’t make your payments on time, so they can earn compounding interest,” Mr. Pommen said.

When there are problems, however, some consumers have reported difficulty contacting the financiers to resolve the matter. Mr. Pommen admits he made “an enormous mistake” by freezing hiring early in the pandemic, and spent the summer catching up. Flexiti acknowledges it had some “administrative challenges” after introducing new processes to facilitate a payment relief program during the pandemic, which resulted in higher call volumes and longer wait times.

Regardless of the concerns, the buy-now-pay-later sector is growing fast. Mr. Kalen expects Flexiti will go public in the coming years, and push further into e-commerce financing.

The sector is attracting renewed interest from financial services giants. “We’ve have significant acquisition interest already from U.S. and foreign players, and a bit of door-knocking from domestic players,” Mr. Pommen said. More retailers are also coming on board. PayBright now partners with more than 7,000 merchants, up more than 50 per cent in the past year.

“COVID accelerated it,” he said. “Merchants are saying, ‘E-commerce is a really important priority. And we need all the sales tools that we can get.’ ”


These are just some of the brands vying for a piece of this growing business – in Canada and around the world.


Klarna Bank AB

Founded 2005; private

HQ: Stockholm

Retailers: 200,000+

Customers: 12 million monthly active app users

Markets: 17 countries including the United States, Britain, Sweden, Germany, Australia; partnership with PayBright in Canada


Affirm Holdings, Inc.

Founded 2012; private, filed for IPO on Nov. 18

HQ: San Francisco

Retailers: 6,500

Customers: 6.2 million

Markets: U.S. and Canada


Afterpay Ltd.

Founded 2014; in process of acquiring Pagantis; public

HQ: Melbourne, Australia

Retailers: 55,000+

Customers: 11 million+

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


Zip Co Ltd.

Founded 2013, acquired QuadPay (founded 2017) this year; public

HQ: Sydney, Australia

Retailers: 34,400

Customers: 4.5 million

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


Sezzle Inc.

Founded 2016; public

HQ: Minneapolis, Minn.

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

Customers: nearly 1.8-million

Markets: U.S., Canada, India


Founded 2009; private

HQ: Toronto

Retailers: 7,000+

Customers: 600,000+

Market: Canada


Flexiti Financial Inc.

Founded 2013; private

HQ: Toronto

Retailers: 5,000+ locations

Customers: 1.3 million

Market: Canada

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