Banking

Buy Now, Pay later: Popularity, Banks, and Regulation

There is a popular method of purchasing that special gift for your loved one, or maybe a must have item. It’s called, “buy now, pay later” (BNPL) and it’s been growing in popularity the last few years not only in the United States, but worldwide. BNPL is being fueled, in part, by the coronavirus pandemic as a demand for online shopping increased. BNPL basically allows customers to buy items without paying for them all at once. Customers pay a portion of the price upfront, and spread the remaining cost over a predetermined number of installments. Companies are promoting BNPL as an alternative to credit cards because it offers lower fees and low or no interest which may be attractive to the younger generation wanting to move away from credit cards to avoid debt. Providers like Affirm, Klarna, Paypal, and Afterpay, just to name a few, and retailers like Macy’s, Target and Walmart are promoting and offering BNPL.  

Esteban Santana

There are differences between BNPL, credit cards, and consumer loans. BNPL allows consumers to make payments over several installments and there is normally no interest payment as long as the consumer pays on time. Otherwise, missing payments or spreading the cost over a longer period of time may result in late fees, penalties or high interest rates. Credit cards also allow consumers to pay over a period of time, but only require a minimum payment due and charge interest along the monthly payments. Credit cards often offer rewards (cash back, miles, points) with purchases; BNPL does not. Consumers may want to think about BNPL as short-term financing with equal payments over a specified time, usually up to four months. A consumer loan provides financing, secured or unsecured, for a consumable item. Typically anytime a consumer borrows money from a lender, it’s considered a loan.    

Both fintechs and financial institutions are competing for a market share of BNPL. Chase, Citi, JP Morgan, Visa, and Mastercard are offering BNPL through their credit cards. It is estimated that by 2025, BNPL will have approximately $680 Billion in transactions worldwide. According to PayPal’s CEO Dan Schulman, during Black Friday their volume was almost 400% year over year from customers using BNPL. The California Department of Financial Protection, the first and only state regulator to license BNPL companies and regulate their products as loans, estimated the number of consumer loans rose by 530% in 2020 which is over 10 million BNPL loans. It seems unavoidable that in the near future banks may leverage their data, trust, and established relationships with customers to offer BNPL.

The explosive growth of BNPL has caught the eye of Congress and the Consumer Finance Protection Bureau (CFPB). In December 2021, the CFPB issued orders under its authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) to five companies offering BNPL credit. The orders were to obtain information on the risks and benefits of BNPL in order to report to the public about practices and risks. CFPB Director Rohit Chopra described BNPL as a new version of the old layaway plan, but more sophisticated. Due to the growth of BNPL, the CFPB is working with Australia, Sweden, Germany and the UK and coordinating with the Federal Reserve System to examine providers. According to the CFPB, the main concerns are debt, regulation, and data collection. BNPL has a questionable regulatory structure because they typically offer “loans” that are paid in fewer than five installments and fall outside the Truth in Lending Act’s disclosure requirements. Providers fall under the Dodd-Frank Act to prevent unfair, deceptive and abusive lending practices which means CFPB can bring actions against lenders. As of November 2021, California is the only state that treats BNPL loans as lines of credit. Under the California Financial Code (Division 9, Article 3, Section 22100), “No person shall engage in the business of a finance lender or broker without obtaining a license from the commissioner.” In 2020 and 2021, the Department of Business Oversight of California issued four Consent Orders against providers for making loans through “buy now, pay later” without obtaining a license. The settlement totaled $1.9 million.      

As BNPL continues to grow in 2022, if consumer complaints increase in numbers, so will the regulations to govern this area of innovation.

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