Buy now/pay later products claim to offer consumers a risk-free way to boost their buying power, and maybe build credit and help others in the process.
But beneath the shiny new veneer of technology and altruism could lurk the same predatory and abusive practices used by venture capitalists whose primary interest is profit, and who in the past have used similarly altruistic pretensions to exploit Black, Hispanic, military, essential and early-career employees, and other hardworking Americans.
These products are credit, and providers should be held to the same standards as other lending companies. BNPL products do not offer the standard consumer protections required of credit card providers or other regulated lenders, and their opacity regarding fees and repayment terms could easily place unwitting consumers into harmful, unaffordable debt. Regulators should ensure that BNPL lenders make loans only after determining the borrower’s ability to repay (considering both income and expenses or obligations), and that these lenders are not charging unfair fees.
The lack of transparency into how these products work mirrors questions raised about other so-called innovative lending products — subprime mortgages and payday loans, for example — that took advantage of borrowers without financial resources or traditional banking relationships. That’s why the Center for Responsible Lending was among the first groups to call for the Consumer Financial Protection Bureau to engage in active regulatory oversight of BNPL lenders.
Especially troubling is the potential harm that BNPL offerings pose to the financial security of already debt-burdened low-income families. And we know abusive financial practices have a disparate negative impact on Black and Hispanic Americans, preventing their access to fundamental levers of wealth-building needed to close the racial wealth gap.
As we pointed out in congressional
Further, the time for regulators to rein in BNPL is now. The scale and number of BNPL offerings have exploded, with data suggesting an increase anywhere from 200% to 350% in the past year alone. Some projections show BNPL reaching 10% of all e-commerce dollar volume by 2024. It is clear that, to the extent there are risks within the BNPL market, they exist on a wide and growing scale.
The fact that this appears to be a “free credit” product raises the question: What’s the catch? It turns out there are a number of catches — some demonstrable, some potential — that require regulatory attention and response.
For borrowers who have the ability to repay, BNPL may be preferable to a credit card or other forms of borrowing as a way to purchase goods. If no- or low-cost installment loans offer responsible closed-end credit that consumers can pay off within a reasonable time frame, consumers may indeed benefit substantially. But a number of incentives in the BNPL space make these products particularly susceptible to unaffordable lending.
Users of these financial products tend to lack the means to pay off their entire balance each month, and often find themselves in debt, month after month, for years on end. Therefore, it is imperative that these loans be responsible and the payments affordable, and that consideration should apply not only to the interest rate — which may be zero percent — but the principal. Otherwise, these loans will add more unsustainable debt onto payment burdens consumers already are struggling to manage.
The consequences of unaffordable BNPL loans can be severe. When the borrower’s BNPL loan is linked to a bank account that lacks sufficient funds for payment, the BNPL lender’s payment attempts typically will trigger highly punitive nonsufficient-funds fees or overdraft fees. These fees are highly associated with closed bank accounts and exclusion from the financial system.
Many BNPL providers charge their own late or returned payment fees on top of the fees charged by banks. Or, the borrower may have sufficient funds for the BNPL payment, but then will be left without sufficient funds for other essential living expenses or debts.
There are other worries as well. Many BNPL lenders do not engage in traditional underwriting; instead they simply verify customers’ identities and require a debit card or credit card to make payments and run a “soft” credit check, but not a hard credit inquiry. That means lenders may have little or no insight into a borrower’s ability to repay.
To the extent BNPL loans are underwritten, the process is largely, if not exclusively, driven by credit allocation algorithms. These loans can thus be subject to algorithmic bias, reinforcing the need for data and oversight to identify and address any fair-lending concerns.
And most BNPL lenders do not report repayment to credit reporting agencies, which means BNPL offerings typically don’t do anything to help consumers build or improve their credit scores. When BNPL lenders do report to credit bureaus, late payments may negatively affect credit history.
We appreciate the CFPB’s decision to focus on these rapidly growing products marketed as solutions to managing cash flows or as offering access to affordable credit. We need to understand what is going on with these products, and regulators must ensure that BNPL lenders are not engaging in unfair, deceptive or abusive acts or practices, or unlawful discrimination.
All Americans deserve financial fairness. We cannot get our economy roaring at full speed if we continue to allow marketers to target hardworking people with products that actually make it more difficult for them to attain financial security.
