Canadian Consumers Want Choice – Let’s Continue To Innovate Together

Digitization has revolutionized financial services, offering more sustainable credit, new payment options, and healthier financial tools for Canadian consumers. This has reduced costs, accelerated access to capital, improved transparency, and promoted financial inclusion in the sector. Despite these achievements, there is more to be done to promote consumer choice and financial flexibility.

Bring Back Trust

Technology isn’t the real barrier to progress of digital financial services. What’s really holding this back is a lack of trust. Many individuals have developed a lack of trust in traditional financial services providers, and this sentiment is rooted in legitimate concerns. Traditional banks have lost touch. They often impose hidden fees and charges and come with astronomical APRs and revolving debt. Recent reports have found that nearly half (43%) of Canadians have credit card debt, and of those Canadians, 40% believe it will take six months or longer to pay off the debt and 11% aren’t sure how long it will take them to pay it off. Consumers also don’t trust these traditional providers with their personal data, which is the property of consumers themselves, not banks. 

As a result, regulators and politicians tend not to trust the banks either. So they impose clunky, bureaucratic requirements on them, obliging them to verify customers’ identities, seek their permissions, and ring-fence their money. But these requirements create laborious paperwork for consumers. And that, ironically, helps the gray incumbents of the industry – it discourages customers from changing providers, and hampers the nimbler, more consumer-focused fintech enterprises that should be challenging and replacing the banks.

The rapid growth of the Buy Now Pay Later (BNPL) sector in Canada – evidenced by Klarna’s rapidly expanding network of over 640,000 active consumers and more than 2 million processed orders – underscores the shift that we’re seeing among consumers who are turning away from the greed-fueled practices of old banks and high-cost credit cards towards flexible and better-value payment methods like Klarna. That said, while BNPL volumes in Canada are expected to grow by 51.6% on an annual basis in 2023, they are still less than 2% of Canada’s US$ 110 billion revenues made by credit card companies. 

Not All Credit Is The Same

We are seeing similar trends in other parts of the world, where consumers are actively looking for alternative payment methods designed to save them time, money and better manage their finances. As a result, regulators are realizing that existing consumer credit rules are no longer fit for today’s consumer. Regulatory reform is underway in the US, the UK and Europe, and although it’s happening at different speeds, there is broad alignment and regulators recognize that BNPL is lower risk than longer-term, interest bearing credit and are designing protections accordingly. 

This is crucial because interest-free BNPL and traditional forms of credit are fundamentally different products. Where traditional credit depends on interest payments for its revenue, interest-free BNPL is designed to be free to the consumer. This matters because the incentives of BNPL providers are highly aligned with those of their consumers. Just as falling behind on payments is bad for consumers, it is also bad for the provider who earns no interest but incurs additional costs from late payments. Contrast this with a credit card company, which would go bust if we all paid our credit card bill within the interest-free window. 

As a result, BNPL providers like Klarna conduct robust eligibility checks on each and every purchase to ensure our lending is responsible and people can afford to repay. This compares to credit cards or overdraft facilities where checks are primarily carried out at the opening of the account. And the result is that global average outstanding BNPL balances are less than one tenth those of credit cards (C$200 for BNPL vs C$2,121 for credit cards). It is essential to our business model as we make our income by charging retailers a service fee for the use of Klarna, not by charging consumers with sky-high interest rates. 

Learnings From Abroad 

The regulators’ challenge is to regulate in a way that genuinely protects consumers, and promotes competition and choice – the objectives of any sensible regulatory regime. Setting out plans for proportionate regulation that’s in the interest of consumers while leaving room for providers to continue to innovate. That is for example the route the Treasury in the UK and European Commission have taken. 

At the same time, we need to fix some fundamentals to combat overspending. We believe credit registries play a vital role in a well-functioning credit market, but the system – such as the Metro 2 reporting standard in Canada – is based on old practices and technology such as inconsistent reporting approaches, absence of real-time data or no distinction between types of credit. 

Governments should accelerate the development of public and centralized debt registries to facilitate more complete credit information sharing across all credit products, and not rely on private organizations with commercial motivations. They should also ensure that consumers using interest-free short term credit do not get their credit score negatively affected because the systems are accurately accounting for these new products. 

Where To Go From Here 

We recognize that consumers’ financial preferences and needs are changing, especially with the cost of living crisis raging and prices at a 40-year high. People are becoming more conscious of their finances, finding ways to save money and exploring better alternatives to personal loans which can charge up to 26% in interest. Access to affordable alternatives to high-cost credit is more important than ever.

Governments around the world face big decisions to balance consumer protections with promoting competition. What happens next will be crucial for fintech – not just in Canada, but everywhere, since other jurisdictions will inevitably look at each other. 

Let’s make sure we continue to promote consumer choice, and not inadvertently slow down innovation. 

About the Author

Steven Clarke is Head of Canada at Klarna.

If your organization seeks to be part of the ongoing BNPL innovation, here’s how you can get involved:

2023 Lenders Summit

The evolving landscape of the BNPL sector has brought about a multitude of opportunities for lenders to service consumers in new and seamless ways. Engaging with the organizations leading and innovating within the sector and beyond makes the upcoming 2023 Lenders Summit a must attend event. Taking place on November 1st at the MaRS Discovery District in downtown Toronto, the focus of the event will be on networking, partnerships, and driving innovation in the lending sector. 

From Banks and Credit Unions to best-of-breed vendors from the fintech ecosystem, the 2023 Lenders Summit is the hub for networking and business partnerships across all consumer and commercial sectors. Main themes include fraud technology, Identity Verification (IDV), financial data solutioning and supporting new-to-Canada and new-to-Credit.

Sponsorship: A variety of sponsorship opportunities that will help position your organization as an industry leader are still available! Contact dean@canadianlenders.org for further information. View the Sponsorship Deck here. 

View the agenda and register your organization here