Scariest financial number of the summer: By 2026, nearly one-quarter of all global online purchases will be made with a buy now, pay later option.
Did you think I was going to quote the inflation rate or something to do with interest rates? Both rates and inflation are a worry, but at least we now know what we’re up against. Buy now, pay later (BNPL) is different because people are still getting acquainted with the option of making installment payments for online purchases of cosmetics, clothes, airline tickets, and more.
The forecast about BNPL was included in a recent review of new payment trends by Mastercard, which reports that 77 per cent of Canadians have heard of BNPL and 30 per cent are comfortable using it right now. Those who were cautious about BNPL tended to cite trust issues associated with the upstart financial players offering the service.
The Mastercard report included a reference to a U.K. study showing that BNPL spending will rise in four years to more than 24 per cent of global e-commerce transactions for physical goods by value, compared to 9 per cent in 2021.
To put this another way, one in four people will buy things online that they very likely cannot pay for in the here and now. No doubt, some people use BNPL to manage their cashflow and find it effective and efficient to pay in small chunks without monthly fees or interest charges. But let’s be clear on the business model for BNPL. Retailers pay the cost of offering this service – they only do that because they see the expense being offset by higher sales.
High inflation and rising interest rates explain why this is a particularly risky time for BNPL to build its franchise. Households are being squeezed by higher costs for food, gas, mortgages, lines of credit, and more. BNPL commitments that seem affordable today could turn nasty in the months ahead, especially for people making multiple installments.
Globe personal finance editor Roma Luciw and I discussed our reservations about BNPL in an episode of our Stress Test personal finance podcast for Gen Z and millennials. Give it a listen before you join the growing crowd of BNPL users.
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Rob’s personal finance reading list
Is tipflation a thing?
A rant about being asked to tip for pretty much any purchase at a café or takeout restaurant. A follow-up to my recent look at greedflation.
Make better decisions about money…and other stuff, too
A list of decision-making tools called razors that can be applied to finance and lots more. One that stood out for me touches on the use of jargon and complexity, which we see so often in the investing world. “If someone uses a lot of complexity and jargon to explain something, they probably don’t understand it.”
How does your tax refund compare?
A summary of 2021 tax-filing stats, including the size of the average refund. Of the 29 million tax returns processed by Canada Revenue Agency for the year, almost 17 million generated a refund. Let’s remember that refunds are an interest-free loan to the government.
The best ultra-premium credit card
A review of American Express Platinum, with an annual cost of $699 that “is more than made up for with all the benefits the card provides.” Benefits focused on travellers.
Ask Rob
Q: Why is CHIP such a bad idea?
A: I gather this reader is referring to the CHIP Reverse Mortgage from HomeEquity Bank. The big criticism of reverse mortgages is that they can seriously reduce the amount of money you receive when you sell your house. Essentially, you’re paying interest to access some of the equity in a home before you sell. What attracts people to reverse mortgages is that you don’t have to repay principal or interest until the sale of your home. Headline on a column I wrote about reverse mortgages several years ago: “Time to get over our squeamishness about reverse mortgages.” They are a legit financial tool for people rich in home equity who need cash. One of the biggest issues right now with reverse mortgages is the comparatively high interest rate. There’s a rate special for five-year CHIP reverse mortgages right now – 7.99 per cent. Another tool for borrowing against home equity, the home equity line of credit, costs roughly 5.2 per cent. The downside with HELOCs is that you have to make monthly payments of at least the interest owing.
Do you have a question for me? Send it my way. Sorry I can't answer every one personally. Questions and answers are edited for length and clarity.
Today’s financial tool
A reader asked for a downloadable retirement planning spreadsheet and I sought suggestions in a recent newsletter. A couple of people mentioned the range of spreadsheets available on the Measure of A Plan website.
The Money-Free Zone
Blues guitarist Gary Clark Jr. plays When My Train Pulls In live. In the before-Covid times, I saw him at Ottawa’s Bluesfest and this song was a highlight.
Watch this
A Tiktok video about a tiny and expensive shoe box, aka a Toronto condo unit for sale.
Caught on Twitter
CBC host Piya Chattopadhyay on her frustrations trying to open bank accounts for her children. I suggested checking out the Tangerine children’s savings account.
What I’ve been writing about
- Cancelled: The idea that a big mortgage is a noble burden because home prices will rise
- A shopping list of ETFs for people who worry about recession
- What’s wrong with my dividend ETF?
More Rob Carrick and money coverage
Subscribe to Stress Test on Apple podcasts or Spotify. For more money stories, follow me on Instagram and Twitter, and join the discussion on my Facebook page. Millennial readers, join our Gen Y Money Facebook group.
Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Is the middle class dead for millennials and Gen Z? • Gas prices are soaring. Are electric vehicles an affordable solution? • Crypto is booming, but should you invest? • How are young Canadians dealing with soaring rents? • Inflation is squeezing our finances. What can we do about it? • Is a hot housing market squeezing Canadians out of their small towns?
- ✔️ The housing file: How bad is housing affordability? Even a crash won't help • Sell the family home to lock in profit and then rent? Better not • Why young adults can't afford houses: Hard work got you more in the past than it does now • Five reasons you should not buy a house till you're at least 30 • Now more than ever, owning a house is not a retirement plan
- 📈 Investing: The 2022 ETF buyer's guide: Best Canadian equity funds • The 2022 Globe and Mail digital broker ranking: Does the zero-commission revolution flip the script on who's best? • With bonds sinking, conservative investors are waking up to risks they never saw coming • A five-step plan for dealing with the sad fact that almost every investment is falling lately • The best financial advice in advance of retirement? Work on your marriage • One-year GICs are the best deal in town for safety seekers • What to do if the financial plan you paid thousands for disappoints
- 💰 Your money: Are you prepared for the pandemic wealth boom to blow up in our faces? • This hard-working 24-year-old is nailing it financially. But where's the happiness? • Who should and shouldn't worry about the wave of rate increases this year, and what every stressed-out borrower should do right now • Don't make this potentially costly assumption about the CPP Survivor's pension
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