Consumers Turn to ‘Buy Now, Pay Later’, Fanning Repayment Ability Concerns | Business



Well-established companies like The Goldman Sachs Group Inc. and Mastercard Inc. are jumping headlong into a fintech product that some critics say poses risks to consumers.

The service, known as “buy now, pay later,” or BNPL for short, is a variation on the old-fashioned layaway plans once offered by retailers. The difference is that consumers get their products immediately, and many of the plans can come from their financial companies, not the vendors.

Mastercard announced last month that it was launching a service that will give customers a flexible way to pay online or in-store via interest-free installments. The BNPL “Mastercard Versements” program will be offered in the United States, United Kingdom and Australia.

PayPal Holdings Inc. acquired Japanese startup Paidy Inc. last month for $ 2.7 billion to deepen its BNPL offering. Goldman Sachs and Apple are teaming up to launch a BNPL service called Apple Pay Later.

The payment model has grown in popularity in the United States since the start of the COVID-19 pandemic, allowing consumers to split their purchases into several smaller – typically four – interest-free payments, which are made every two weeks or more. monthly until the balance is paid. in full. Most charge late fees for missing payments.

Experts say the rapid expansion will certainly attract the attention of regulators.

“The BNPL space is developing rapidly. When it comes to credit, consumers are drawn to options that make choices easier and simpler processes, and BNPL does both, ”said Jo Ann Barefoot, former deputy currency controller and member of the Senate Banking Committee who now heads the Alliance for Innovative Regulation in Washington. “These very characteristics, however, are of concern among advocates and regulators, so that the regulatory emphasis increases in proportion to the growth of these products.”

Some of the regulatory reactions to date include the Consumer Financial Protection Bureau in June informing consumers of the benefits and pitfalls, and the UK’s Financial Conduct Authority announcement that it will oversee the BNPL industry.

Ted Rossman, Financial Analyst at and Credit Cards.comBNPL said is popular because fixed payments “provide a light at the end of the tunnel” that both feels better for consumers and can save them money compared to a credit card purchase – especially if they only make minimum payments on it at an average interest rate of 16%.

Another advantage, according to the CFPB, is that the approval of a BNPL service, which can be done when paying online or via a mobile app, will only take a few minutes and usually does not involve an “investigation. serious credit ”.

Serious inquiries are usually done by lenders after a consumer has applied for credit and have an impact on a person’s credit rating because they can indicate that the consumer is asking for more credit.

Most BNPL providers require applicants with a validated identity to state that they are at least 18 years old, have a mobile phone number, and have a debit or credit card to make payments.

Retailers are also increasingly embracing the model, said Penny Lee, CEO of the Financial Technology Association, a Washington-based fintech industry group. She said they could see the option as a path to increased sales, more repeat purchases, higher customer conversion rates, increased brand engagement and greater customer satisfaction.

“BNPL provides small and medium-sized traders with a platform to compete with large online marketplaces and establish a direct relationship with the consumer,” she said.

CNBC, citing data from FIS Worldpay, valued the BNPL market at $ 60 billion worldwide in 2019, or 2.6% of e-commerce, excluding China. BNPL represents less than 2% of sales in North America. FIS Worldpay has estimated the payment option could reach $ 166 billion by 2023, according to CNBC.

“Debt is debt”

Experts warn consumers that there can be downsides.

“Debt is debt, and BNPL is very easy debt to incur and forget when managing your personal finances,” said Todd H. Baker, professor at Columbia University Law and Business Schools in New York. “It adds considerable complexity to the stressed financial lives of consumers already over-indebted with debts for mortgages, credit cards, auto loans and personal installment loans.”

“Late fees are another potential danger,” Rossman said, pointing to research showing that 43% of users of these services have paid late at least once in the past two years. Small amounts like $ 10 may not seem like a lot, “but they can add up on a large scale,” he said.

He said missing installments can also hurt a consumer’s credit rating, sometimes even after just 30 days.

Barefoot warned that the relationships between BNPL’s lenders and retailers may result in the consumer being offered an easy loan that compares unfavorably to other options, which people might find if they took the time to research, ” but this is generally not the case “.

“It is feared that the borrower’s decision will be swift, without ‘pause to think’,” she said. “At the point of sale, the desire for instant gratification can dominate the decision-making process because the consumer really, really wants the thing they are buying.”

Sezzle Inc., a self-proclaimed fintech company “with a goal” that offers small-installment loans for online purchases, settled an enforcement action last year with the California Department of Business Oversight. State regulators have concluded that Sezzle was making illegal loans under California law. They demanded that the company reimburse consumers $ 282,000 and pay a penalty of nearly $ 30,000.

AJ Dhaliwal, special advisor to law firm Sheppard, Mullin, Richter & Hampton LLP, said whether BNPL products could be considered loans was not really an issue until regulators Californians consider them to be “loans”, although a common understanding of the relevant statutes and case law would not likely have resulted in the same legal conclusion.

Due to California’s influence in financial supervision among states, “there is a fear that other regulators will come to a similar conclusion, which could lead to a decrease in the popularity of the use of BNPL.” Dhaliwal said.

He said regulators are increasingly concerned that the service “represents significant potential harm” in terms of consumers’ perceived lack of understanding of the risks, “which could lead to over-indebtedness, and all of which are exacerbated by the speed. and the convenience of these platforms and consumer demand.

Going forward, industry watchers expect more regulation. Barefoot, Baker and Rossman believe the CFPB is probably taking the lead at the federal level.

But Dhaliwal said he expects businesses to continue to be regulated by “a myriad of federal and state regulators seeking to enforce their specific consumer credit laws.”

Baker said vendors “would rather be ignored,” on the basis that they don’t really lend at all, but this is an “unlikely outcome, given the size of the BNPL industry and significant late fees and collection activity associated with the product. “

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