Financial Literacy to Credit Reporting: The Status of BNPL in Canada

Abstract: Key issues for the Buy Now, Pay Later (BNPL) sector in Canada as we look toward 2025 include evolving regulatory frameworks, data privacy concerns, financial literacy, and the integration of BNPL into credit reporting. 

The Buy Now, Pay Later (BNPL) sector has experienced exponential growth in Canada over the past few years. As a flexible payment option, BNPL has resonated with consumers seeking alternatives to traditional credit cards, particularly amid inflationary pressures and increasing household costs. However, this rapid expansion has prompted significant regulatory scrutiny, raising crucial challenges for BNPL providers in 2024.

The Canadian Lenders Association (CLA) stands at the forefront of industry advocacy and recognizes the importance of these developments. Here, we outline the key issues that will shape the BNPL landscape in Canada in the coming year.

👉 Financial Literacy

BNPL services are often marketed as an easy alternative to credit cards, but the risks of debt accumulation are becoming more apparent. As highlighted in guidance from regulators like the OCC, the possibility of consumers falling into unmanageable debt cycles is a key concern. This is particularly relevant as BNPL services attract younger consumers who may lack financial literacy, making them more susceptible to over-commitment.

The CLA is working to bolster consumer education and improve financial literacy. We have launched an initiative to harmonize best-practices across our lending sectors. Stay tuned. In 2024, the CLA expects an intensified focus on ensuring that consumers fully understand the terms of their BNPL agreements, including fees, interest rates, and the implications of missed payments. Providers that fail to prioritize transparent communication will likely face regulatory actions and lose consumer trust.

👉 Data Privacy

As BNPL platforms gather more consumer data, issues around data privacy and cybersecurity are taking center stage. These platforms often rely on cutting-edge technology and data analytics to approve transactions and assess creditworthiness. However, the volume of personal information being collected raises red flags for both consumers and regulators.

In 2025, we anticipate that Canadian regulators will increase their scrutiny of BNPL platforms’ data protection measures. Ensuring compliance with privacy laws such as the Personal Information Protection and Electronic Documents Act (PIPEDA) will be essential. BNPL providers will need to invest in robust cybersecurity infrastructure to prevent data breaches and build consumer confidence.

👉 Credit Reporting

One of the more contentious issues in the BNPL space is the question of whether BNPL should be integrated into traditional credit reporting mechanisms. While BNPL loans are often not reported to credit bureaus, this raises concerns about responsible lending practices and the broader impact on consumers’ financial health.

A failure to report BNPL transactions could mean that consumers are over-leveraged without this being reflected in their credit scores. On the other hand, integrating BNPL into credit reporting could create a more accurate picture of consumers’ financial obligations but may also lead to an increase in defaults and damage to credit scores. We expect that this debate will intensify in 2025 as regulators and industry stakeholders alike seek a balanced solution that ensures responsible lending while protecting consumers’ financial well-being.

👉 Regulatory Framework

The regulatory environment surrounding BNPL is tightening both domestically and globally. In Canada, policymakers are becoming increasingly concerned with the lack of transparency and potential consumer risks associated with BNPL products. The Office of the Superintendent of Financial Institutions (OSFI), and provincial regulators like the Financial Consumer Agency of Canada (FCAC), are pushing for greater regulatory oversight.

Looking south of the border, the U.S. Office of the Comptroller of the Currency (OCC) has already issued guidance to banks regarding BNPL offerings, highlighting potential risks such as consumer over-indebtedness, data privacy, and credit reporting challenges. As regulatory standards evolve, Canadian regulators are likely to adopt similar stances, calling for increased disclosure obligations, stress testing of BNPL providers, and enhanced monitoring of consumers’ ability to repay.

BNPL providers will need to align with these regulatory expectations while continuing to offer accessible, affordable services. As we mentioned last year, transparent disclosure practices and enhanced consumer protection mechanisms will be critical as we anticipate increased scrutiny in 2025.

👉 BNPL Maturity

While the sector has thrived on high volumes of transactions with low interest rates or fees, rising interest rates, and inflation may challenge BNPL providers’ ability to maintain profitability.

In 2025, we foresee increased pressure on BNPL providers to balance profitability with consumer protection. As margins narrow, companies may be tempted to increase fees or tighten lending criteria, potentially alienating consumers who have come to rely on the flexibility BNPL offers. Industry players will need to innovate their business models and explore new revenue streams to sustain growth.

Increased regulatory scrutiny, consumer protection concerns, data privacy issues, and the sustainability of the business model are a challenge and a harbinger of the maturity of this sector.