Buy now, pay later Funding has taken off in recent years, and regulators are taking notice. Although lenders offering this financing tout its convenience, consumer advocates worry about inadequate regulation. The ease with which consumers can access these loans could also cause them to bite off more than they can chew.
Last December, the Consumer Financial Protection Bureau (CFPB) launched an investigation in some fintech companies offering BNPL funding. The agency sought advice from Affirm, Afterpay, Klarna, PayPal and Zip on the risks and benefits of their BNPL offerings.
According to CFPB Director Rohit Chopra, “Buy Now, Pay Later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but also gets the debt immediately. .”
As the name suggests, this type of financing allows consumers to purchase and take possession of an item, then pay for it in a specific number of installments, usually four or less, or over a specified period of time. Consumers also usually pay a deposit on the purchase. Merchants who accept this form of financing pay a fee, varying from 3-6% of the purchase price, to BNPL lenders, as it helps them generate more sales.
This niche has certainly grown rapidly over the past few years. According to a report from Accenture (powered by Afterpay), the number of BNPL users in the United States has grown by more than 300% each year since 2018. In 2021, there were 45 million active users spending more than 20 billion dollars.
Consumer protection issues
Despite this growth, there are some gaps in terms of the protections offered by BNPL financing. The CFPB, for example, points to issues of “regulatory arbitrage” and the use of consumer data to generate more sales.
It appears that lenders may not be disclosing enough to consumers and that the protections that apply to credit card purchases do not apply to BNPL financing. For example, it can be difficult to hold a trader accountable if something goes wrong.
In addition, it is easy to accumulate debt with this form of financing since BNPL lenders, unlike credit card lenders, do not need to consider consumers’ ability to repay a loan before lending to them. Consumers have to pay late fees when they don’t make their payments on time, although lenders say there are no other finance charges associated with BNPL financing.
Responding to a notice issued by the CFPB asking public commentconsumer Erica Paige noted that her usual practice for large purchases is to charge her credit card and then pay the balance with her next paycheck.
“I thought it was good to separate the interest-free payments, which would make it feel less impacted,” Paige said. “But I spent more money than usual because it was so easy. I ended up paying the amounts back after a few weeks because I really don’t like lingering debts.
She observed that the process of getting the loan was easy, without any credit checks, and the only information required was her credit card number (so she was basically using her credit card to pay off another loan ).
Commenting on data privacy concerns, the public interest research organization Electronic Privacy Information Center, said, “EPIC urges the Bureau to complete its proposed investigation to better understand data collection, BNPL Supplier Data Use, Disclosure and Retention. This will improve transparency and oversight of an industry that appears to be gaining traction among multiple populations of marginalized consumers.
A group of 77 consumer organizations, including the Center for Responsible Lending and Consumer Reports, recommends that credit card rules be applied to BNPL credit that provide consumers with protections such as “dispute and chargeback rights, cost transparency, consistent disclosures and reporting, reasonable penalty charges, and underwriting a consumer’s ability to repay. »
Make BNPL lenders more accountable
Although BNPL’s lenders may be subject to various federal laws, they are not held accountable due to the way they operate.
“The ‘pay in four’ business model appears designed to evade the Truth in Lending Act, which, among other TILA requirements, requires 5 payments to trigger its installment loan rules,” said Ed Mierzwinski, Senior Consumer Director for USPIRG, a consumer advocacy organization. group. “TILA’s Fair Credit Billing Act, which applies to indefinite credit, requires that indefinite creditors (including credit and charge cards) give you certain billing and dispute rights. Yet BNPL companies appear to be imposing these creditor demands on traders. »
Mierzwinski added that BNPL businesses could also be subject to the Electronic Funds Transfer Act, which states that consumers cannot be required to use a certain method of payment, such as automatic withdrawals. There have been complaints that not all BNPL lenders have followed this requirement. Mierzwinski expects the CFPB to make it clear that BNPL funding is subject to TILA and EFTA so that those laws are enforced in this niche.
“We welcome partnering with policy makers to better understand how consumers are using BNPL solutions and the impact on their financial well-beingsaid Penny Lee, chief executive of the Financial Technology Association, a trade group for the fintech niche, in response to the CFPB’s request for input. “Future policy should be based on proper analysis of actual consumer outcomes, including with respect to credit reports, financial health, and consumer choice and preferences.”
State level regulatory efforts
States such as California and Oregon have been more proactive than others in holding BNPL companies accountable. In Oregon, these companies are subject to laws governing installment retail contracts. Jason Horton, spokesperson for the Oregon Department of Consumer and Business Services, noted that other states are also considering how best to monitor this space.
“Regulatory trade organizations, such as the National Association of Consumer Credit Administrators (NACCA), frequently provide model laws or guidance to states to help create more uniform regulation,” Horton said. “It is possible that the committee (NACCA’s Emerging Issues Committee) will recommend that NACCA produce a white paper or model law in this area, but the committee has only recently begun to address this issue. “
In California, BNPL financing is subject to the California Finance Act and also requires a license under this regulation. In 2020, the state ordered QuadPay, Afterpay, Sezzle, and Klarna to refund fees received from borrowers and obtain a license under the CFL.
“Today, companies offering ‘buy now, pay later’ products in California are required to consider the borrower’s ability to repay the loan and are subject to strict rate and fee caps,” State Department spokesman Mark Leyes said. Financial protection and innovation. “Like other CFL licensees, these companies must address consumer complaints submitted to the Department, providing consumers with additional remedies and protections when they suspect they have been wronged.”
Credit report issues
In a joint submission responding to the CFPB’s request for public input, attorneys general from 21 states noted that in addition to concerns expressed by other authorities, they are concerned about the impact of BNPL loans on credit reports. consumers.
The credit bureaus, which previously did not report on BNPL loans, recently announced plans to add these loans to credit reports. “The introduction of credit reporting to the BNPL industry may lead to a host of other problems,” the attorneys general noted. “In fact, a third of complaints about BNPL loans submitted to the CFPB so far relate to incorrect information on a consumer’s credit file. We urge the CFPB to analyze BNPL’s credit reporting policies and procedures and the information that BNPL suppliers provide to credit bureaus.
They also expressed concerns about the follow-up of debt collectors in case these loans are collected. It appears that debt collectors do not have enough information to validate loans and correctly identify consumers, as BNPL lenders do not receive much information from consumers or rely on credit reports to grant these loans.
BNPL lenders who report to credit bureaus would be subject to the regulations of the Fair Credit Reporting Act.
Credit card lenders also offer BNPL plans
According to the CFPB, it is unclear to what extent BNPL loans directly compete with credit cards. While it is likely that BNPL loans will take market share from credit cards as a means of consumer finance, it is also possible that the availability of BNPL itself has generated some consumer demand.
Some card issuers have started offering installment payment plans for credit cards. The Visa and Mastercard card payment networks have also added features allowing card issuers to offer installment payments.
In a commentary submitted to the CFPB, Visa noted, “The CFPB should adapt its approaches to preserve the ability of consumers and merchants to access a wide variety of payout options and maintain competition between BNPL solutions, so that consumers have maximum flexibility to access the payment. choice of their choice. »
This growing proliferation of BNPL lenders has also raised concerns that they may have to reduce the fees they charge merchants. This could cause them to make up for lost revenue by adding other fees to consumers.
“BNPL is challenging existing credit card business models,” Mierzwinski said. “The card companies are fighting back. The explosion in the use of BNPL and the evolution of its business models require constant reassessment and evaluation of its impact on markets and consumers. »
The bottom line
Installment payments using BNPL funding have grown rapidly and caught the attention of regulators. The CFPB is considering how best to regulate this space, given that the protections available to credit card holders are generally not available to users of BNPL funding. Card networks are also tapping into this space, allowing card issuers themselves to offer installment payments.