Americans have always loved the convenience of instant gratification, from the advent of fast food to the creation of Amazon Prime and same-day delivery. This is especially true for millennials like me. So, it shouldn’t come as a surprise the modern-day “layaway you get to have right away” — known as buy now/pay later — is taking the nation by storm, with 40% of consumers indicating they used at least one BNPL product this past holiday shopping season.
As a growing share of consumers use short-term installment credit to make purchases, it’s clear the added convenience these products provide could also bring heightened risk to consumers without the proper protections in place.
For that very reason, just last month, the Consumer Financial Protection Bureau announced it would look into some of the biggest BNPL credit providers — financial technology companies, or fintechs — stating, “Some BNPL companies may not be adequately evaluating what consumer protection laws apply to their products.”
Here’s why the CFPB’s move was an important first step towards protecting consumers and what further actions must be taken to ensure families can safely benefit from innovative BNPL products, regardless of where they go to meet their financial needs.
First, let’s examine why this product is so appealing and who is using it. BNPL allows customers to purchase items without paying for the total amount upfront, instead spreading out the remaining cost over a predetermined number of installment payments. With most companies offering interest-free financing and a brisk approval process, the popularity of the product has exploded. Shoppers from younger generations are looking for simple, seamless experiences that allow them to responsibly finance large purchases without the potential consequence of insurmountable debt. Since 2019, millennials’ use of BNPL has more than doubled and Gen Xers’ adoption more than tripled.
There’s no doubt the continued rise of alternative financing is here to stay. New research from Citizens Financial found 54% of U.S. consumers believe they likely will use a buy now/pay later financing service on one of their upcoming purchases. On Black Friday alone, PayPal reported more than 9 million Americans used its recently launched Buy in 4 platform. Volume sales on Black Friday totaled 750,000 transactions within 24 hours — a fivefold increase over 2020.
Many of the nation’s leading merchants, including Target, Macy’s and Walmart, have partnered with fintechs to provide millions of Americans the ability to choose an installment financing plan when making a purchase. Although fintechs may offer added ease for consumers using an app, some users of these platforms lack the high level of protections they have come to expect from their bank, which — unlike a fintech provider — is subject to stringent federal oversight requirements. This regulatory disparity can result in fintech BNPL users accumulating high levels of debt while also subjecting them to greater risks. For example, consumers using multiple BNPL financing options may have trouble keeping up with payments and could find themselves unknowingly taking on more debt than they realize and are able to afford.
Conversely, banks engage in rigorous underwriting practices to ensure outstanding debt is taken into account before a consumer is approved to make a purchase with BNPL credit.
Fintechs, on the other hand, lack federal oversight and may not take into account an applicant’s credit history and ability to repay in their approval processes. This may be contributing to some of the concerning repayment behavioral trends seen over the last year. Notably, a recent Credit Karma study found that of the 34% of BNPL users who fell behind on one or more payments, nearly a third believed their credit score dropped significantly as a result.
Applying the same underwriting requirements to fintechs as banks abide by — while also mandating they report BNPL purchases to credit bureaus — will help strengthen the financial health of consumers and mitigate their potential for unsustainable and unwanted levels of debt.
Further, because fintechs rely on the sensitive profile data and valuable payment histories of their customers to approve a BNPL purchase, users of these platforms are also at greater risk of fraud. As Kevin Gosschalk, CEO of the fraud-prevention firm Arkose Labs, recently said: “Fintechs are very lucrative because they’re typically fast-growing, early-stage companies. They potentially have much lower controls than the big banks that have been around for many years on the security side, so it makes them a good target.” Banks have numerous rules and procedures to protect their customers’ information, including multiple federal agencies examining for compliance of those laws and limits on banks’ ability to disclose certain customer information to third parties.
Fintechs also are not subject to all the strict consumer protection standards as banks, putting consumers even more at risk. In June of last year, class-action lawsuits were brought against the BNPL giants Afterpay and Affirm over allegedly deceptive marketing practices that resulted in excessive fees for consumers.
As more Americans choose BNPL financing as a credit alternative, all consumers deserve the certainty of knowing they are receiving the highest level of protections, whether they choose a product issued by a fintech or a traditional bank. To achieve this, policymakers must institute a level regulatory playing field in the BNPL marketplace. Doing so will help ensure consumers can safely benefit from the features of this transformational banking innovation.
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