Buy-It-Now, Pay-Later Systems Attract Attention from Consumers and Federal Regulators | Borrowing & debt


IIt’s a customer’s dream. A $250 coat can be bought for $50, hundreds of dollars worth of makeup can be sent to your doorstep for just $20. The catch: you will eventually have to pay the full price of the purchase. But for now, only a fraction should come out of your bank account.

So goes the enticing nature of Buy Now, Pay Later (BNPL), the payment method that allows consumers to pay for their purchases in installments, largely without interest. But the multibillion-dollar trend worries government officials — and even some consumers.

The benefit to consumers is more hazy. Consumers report a complicated relationship with BNPL companies, often characterized by an instant buy, followed by a dip once payments are deducted from their wages every few weeks.

“Emotionally, when I get the package, I’m pretty happy,” said 21-year-old Sandra Lopez, who lives in Atlanta. “Then it gets really stressful because you forget about the purchases. They come back to you. Once it’s payday, you’re broke again because you just feel like you don’t have any money… This is not healthy.

Lopez said she racked up $400 in purchases from Klarna, a Swedish financial company that is one of BNPL’s leaders. Lopez said a lot of it was impulse buying and it’s easy to lose control when using BNPL, especially when companies offer enticing deals like free gift cards from $5 to consumers.

“I know I’m shopping, but it also allowed me to buy these items. I couldn’t buy most of these items with my credit card,” she said.

Almost all major US retailers now offer some type of BNPL service to their customers, a change seen only in the past three years. Since 2019, BNPL has grown up 300% in the US, reaching 45 million active users in the country by 2021. BNPL accounts for 2.4% of online retail in the US and is expected to continue growing.

Top BNPL companies are among the most lucrative in the fintech industry. Square recently acquired Australia-based Afterpay for $29 billion last year. Klarna has recently been valued at $45.6 billion.

BNPL’s surge has caught the attention of federal regulators from the Consumer Financial Protection Bureau (CFPB), which in December launched an investigation into the risks and rewards of BNPL loans. The agency asked the five biggest BNPL services – Affirm, Afterpay, Klarna, PayPal and Zip – for their data and policies, citing concerns about the lack of consumer protection regulations.

In a letter urging the CFPB to act, a group of US senators from the Senate Banking Committee said BNPL loans have “the potential to harm consumers”.

“BPL’s suppliers are currently operating without meaningful oversight. They are generally not subject to federal oversight that may detect unfair, deceptive, or abusive practices or other violations of federal consumer protection laws,” they wrote.

Regulators in other countries like the UK and Australia, where BNPL has also increased the number of users, are also considering regulation. BNPL accounted for 2.1% of all global e-commerce transactions in 2020, according to to research of the FIS, and is expected to double by 2024.

At the grassroots level, BNPL companies appear to have a mutually beneficial relationship with retailers and consumers, often earning praise from both groups.

The payment method is for those who don’t have a credit card, as approval for a loan is almost instantaneous, with a smooth check of the consumer’s credit history. The BNPL is particularly popular among Millennials and Gen Z consumers.

For retailers, BNPL provides access to consumers who otherwise might not have made purchases. Consumers also spend more when using BNPL. Rue21, a clothing retailer, saw a 73% increase in average purchase amount when the retailer started using Klarna, according to a case study published by BNPL. Other retailers have reported similar results.

“With Klarna, we continue to see increased spend per visit and increased acquisition of new, younger customers. 45% are under 40,” Jeff Gennettte, CEO of Macy’s Recount investors last spring. “Our goal is to convert all of these new customers into loyal Macy’s customers who come back for future purchases.”

BNPL companies argue that they provide a fairer service than credit card companies and provide consumers with a fairer deal since they do not charge interest. Instead, BNPL companies operate on costs they charge retailers, which typically equates to 1.5% to 7% of a transaction. By comparison, credit companies typically charge retailers 1% to 3% of a transaction.

“Credit cards create inequality. Those who can afford to pay off their balance each month reap rewards through loyalty programs while those who cannot afford to simply take on more debt,” said Klarna CEO and co-founder Sebastian Siemiatkowski. . declaration to investors. “The credit card model just isn’t viable for customers.”

Siemiatkowski echoed recent reports that lavish credit card rewards are somehow subsidized by low-income Americans who use cash or debit cards, but consumer advocates say BNPL may also pose risks to consumers.

“If they work as promoted, they can be useful for consumers to help break down payments into a few small, interest-free chunks without the long-term debt and credit card interest,” said Lauren Saunders, associate director at the National Consumer Law. Center. “But there are certainly a lot of potential downsides.”

Saunders said it’s easier for consumers to get into debt with the BNPL, loans are harder to track because they may not all be in the same place, some companies charge late fees and consumers do not have legal chargeback rights that protect them if they do not get the product. they paid.

It is also unclear what the use of BNPL will mean for consumer credit scores. Purchases aren’t reported to credit bureaus unless a missed payment ends up going to debt collectors, who might file a report. But all major credit bureaus have indicated they will begin working with BNPL companies to obtain BNPL transactions on consumer credit reports.

“At the end of the day, we’re concerned about how the product develops and how the market develops, and we hope the CFPB will provide substantial protections,” Saunders said.


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