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A report released late last year indicated that almost half of U.S. consumers said they used BNPL options to buy meals at restaurants.DARRYL DYCK/The Canadian Press

First we got Buy Now, Pay Later (BNPL). Soon, we should be getting Dine Now, Pay Later.

A report released late last year indicated that almost half of U.S. consumers said they used BNPL options to buy meals at restaurants. In Canada, restaurant owners and upper management have a “strong desire to add buy now, pay later and plan to do it in the next year.”

Innovation in payments is not new. It’s a constant. But some consumers might be able to take advantage of new modes of payment while others will end up being taken advantage of.

The Great Depression was credited with a surge in popularity in what quickly became a popular way to budget for large purchases: layaway. Consumers short on cash were offered the option of paying installments toward their purchase while retailers held their item. Once they had pre-paid in full, they could collect it.

While layaway all but disappeared as credit card transactions became more popular in the 70s and 80s, they made a brief resurgence after the 2008 financial crisis, most notably at Walmart in the U.S. in 2011, in response to many consumers’ ailing credit.

They eventually replaced their layaway offering with Buy Now, Pay Later (BNPL). Now consumers could get the item they wanted first and pay it off with installments after the fact.

In the end, someone has to pay for consumers’ ability to defer paying for goods and services. The rise in popularity of BNPL was associated with 0 per cent interest and no upfront fees, usually spaced out over four payments.

In these cases, the costs are borne by the merchants who effectively sell a $100 item for $94 (as an example) to a third party BNPL service who then handles collection of the $100 from the consumer. The BNPL operator pockets the $100 after having bought it for $94.

And many merchants are happy with this arrangement because consumers are less likely to abandon their online shopping carts at checkout, and they spend more. Moreover, if the consumer ends up missing payments, it’s the BNPL provider’s problem.

BNPL 2.0 is turning into a whole different beast. Strategists in the payments world have predicted that not only will BNPL adoption increase, but we will see an expansion of those services through white-labelled solutions targeting specific activities such as travel, auto repairs and healthcare.

Canadian credit card providers have already gotten into the game, too. You may have noticed that a few days after making a purchase you could log into your credit card account and choose to amortize your purchase into a monthly installment plan without paying interest. The catch is that there might be a “fee” instead.

Scotiabank gives an example on their website of a $600 purchase made on a credit card. Opt for three month installment plan and you are subject to a 2 per cent fee on the full amount (which is $12), amounting to a monthly payment of $204.

Buy Now, Pay Later and the variations of online and point of sale installment loans have been most popular with young, lower-income and less-educated adults. Many proclaim their love for the forced budgeting aspect of installment loans. Some use it because they are not able to get credit otherwise, while some turn to it out of desperation.

In the best of cases, payment innovation in BNPL can help someone kickstart their journey to responsible credit management. In the worst of cases, the most vulnerable consumers get into more financial trouble as they can get carried away with multiple BNPL loans at the same time, missed payments can rack up very high fees, and in some cases be reported to credit bureaus further affecting their ability to tap into traditional credit.

Preet Banerjee is a consultant to the wealth management industry with a focus on commercial applications of behavioural finance research.

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