Today, the Task Force on Financial Technology of the House Financial Services Committee holds a hearing titled “Buy Now, Pay More Later? Investigating Risks and Benefits of BNPL and Other Emerging Fintech Cash Flow Products.”
Years ago, before credit cards were widespread, department stores offered layaway plans on some items. You paid in advance over a weekly or bi-weekly schedule and the store guaranteed (no supply chain disruptions back in the day!) that the item would be in stock after you’d paid the total cost (including some fees for the service). Variants included Christmas clubs and other “holiday club” plans.
Layaway has largely been supplanted, first by the ubiquity of credit cards and lately by the explosion of Buy Now, Pay Later (BNPL) plans. Fintechs such as Affirm, Klarna, Sezzle and Afterpay – a recent entrant from Australia—have contracted with retailers and e-tailers that let you take it home now but “pay in four.” The programs are advertised as “free” to the consumer if all payments are made on time. Hmm, that's the same as a credit card's grace period. And just as merchants pay “swipe fees” to Visa, Mastercard, AmEx and Discover to accept credit or debit cards, merchants pay fees for BNPL plans.
The companies have made claims that they’re not lending money. But as Lauren Saunders of the National Consumer Law Center explains in her prepared written statement for the FSC Task Force today:
“However they are styled, products that provide funding or cash today and that are repaid later are credit. The use of new technologies or models does not make these products fundamentally different than forms of credit that have been around a long time. Shiny fintech garb does not remove the need for basic consumer protections to ensure that credit is affordable, responsible, transparent, and fair.”
In advance of the holiday shopping season, a CNBC story by Alicia Doniger this week highlights that BNPL “has become a popular payment tool among young consumers” and that “More than half of all consumers plan to use BNPL in the next year, and that’s good news for merchants.”
But the CNBC story goes on to include several warnings:
- “Defaults on “BNPL” payments have been rising and experts worry BNPL can be a recipe for overspending.”
- “BNPL draws consumers in with its zero-interest financing, but to guarantee no interest and no fees, consumers must meet certain terms, such as making payments on time and in full.”
- "In a Credit Karma survey released in September, 44% of respondents said they had used BNPL services, and 34% had fallen behind on one or more of those payments…“25% of millennials have missed one payment, while 30% of Gen Z respondents have missed two,” according to the survey."
BNPL is gaining a lot of regulatory attention and it should. After all, the firms' claim that “BNPL is not credit” precedes their coda "and that means it should not be regulated." But, it is credit and regulators are alert:
- In 2020, a predecessor agency to the California Department of Financial Protection and Innovation denied Sezzle a lending license, saying that the “Minnesota-based fintech company had engaged in illegal unlicensed lending in the state.” In 2020, CDFPI ordered Afterpay to make over $900,000 in restitution, pay a fine of $90,000 and register as a finance lender. Last month, a CDFPI report stated that three BNPL firms, also including Quadpay, “agreed to refund roughly $1.9 million in fees to consumers after it was concluded they structured their products to evade regulation. Today, these firms are licensed lenders with the state and must consider consumers’ ability to repay loans, are subject to rate and fee caps, and must respond to consumer complaints.
- Although the U.S. Consumer Financial Protection Bureau has not taken any enforcement actions yet, a summer blog entry warned consumers of possible pitfalls and most analysts, including me, read it as a warning to firms as well. Excerpts: “BNPL products can carry late fees,” "BNPL loans currently lack the consumer protections that apply to credit cards,” and “Returning merchandise bought with BNPL can sometimes be complicated. The BNPL company may hold you responsible for the total cost of a purchase even after you’ve returned the product…”
- In 2019, the CFPB’s UK counterpart, the Financial Conduct Authority, also was an early adopter of BNPL regulations.
As for the banks, they’re keeping a close tab on the competition. From Kate Fitzgerald in the American Banker:
“Visa is now preparing itself for the next and most important phase of the BNPL boom, Al Kelly, the card network's chairman and CEO, told investors during Tuesday’s earnings call…“We’re bringing scale to the disruptors,” Kelly told analysts, adding that through Visa’s two-pronged approach, issuers can extend BNPL loans to existing credit card customers through bank portals while merchants can offer Visa Installments Solution at the point of sale.”
If it walks like a duck and talks like a duck, it’s a duck. Funny how all the fintechs think that the products they create are new and different. Consumers need to watch out for the tricks and traps and remember, there’s no such thing as a free lunch.