Buy now, pay later (BNPL) services are growing by leaps and bounds, but the loosely regulated industry could end up causing more harm than good for consumers, according to a new US government report.
BNPL lenders offer consumers the option of paying for their purchases in interest-free installments over a relatively short period; four payments in six weeks is common. This type of financing is popular with people who don’t have access to traditional forms of credit, and lenders will offer increasingly larger borrowing limits if borrowers exhibit strong repayment behavior. The services are designed to be easy to use and are often seamlessly integrated with online payments, making it almost too easy for consumers to sign up for a new loan.
Unlike banks and credit card companies, however, BNPL lenders only perform limited credit checks, and they don’t know if new users already have loans on competing services. A US Consumer Financial Protection Bureau report released last week warned of the risk of “loan stacking”, where individuals risk getting in over their heads by taking out loans from multiple BNPL companies. The CFPB report, which covered five major lenders – Affirm, AfterPay, Klarna, PayPal
“There is a lack of consideration for any other financial obligation of this consumer,” says Nadine Chabrier, senior policy adviser at the Center for Responsible Lending. “Imagine having 10 different due dates for payments throughout the month, in addition to your regular bills. I think that’s worrisome for a consumer who potentially doesn’t have enough money to buy this product in advance.
When users miss their payments, three of the five companies charge late fees. In 2021, 7% of loans from these three companies triggered such charges. According to the report, “virtually all” BNPL users have autopay enabled on their installment plans, with most paying from a connected debit card. This suggests that borrowers do not forget their payments, but have no funds available in their accounts.
While the majority of BNPL loans are paid with debit cards, individuals have the option of paying with credit cards. This increases the risk for indebted borrowers by allowing them to pay credit with credit. In 2021, 10% of BNPL’s installment payments were made with credit cards. If the cards are not fully redeemed, users must pay interest charges, which average 18.10% in the United States, according to Bankrate.
Lending to riskier clients began to eat into BNPL margins as default rates rose, particularly after the end of Covid-19 stimulus packages. In response, each of the five lenders surveyed reported lower credit approval rates. Companies have also reduced late payment fees in response to increased scrutiny. Additionally, increased competition in the BNPL sector has reduced the fees that merchants pay to businesses.
As two main revenue streams – merchant fees and late payment fees – decline, BNPLs are looking to diversify their revenue streams. One avenue has been to develop their own online e-commerce businesses. Sales generated by retailer referrals account for 0.32% of surveyed BNPL revenue, double the share from two years ago, according to CFPB data. BNPLs are in a unique position to collect customer payment data from retailers, which could be used for sponsored advertising placements or offer user-specific discounts, either for merchants or to promote online shopping malls. BNPL companies.
In prepared remarks, Rohit Chopra, director of the CFPB, said the regulator plans to develop and enforce trade oversight rules.
Neither the CFPB nor merchants will be satisfied with BNPL vendors using consumer data to promote their own online businesses. It is safe to assume that there will be a backlash from traders if their customers start being diverted to BNPL markets from their own tills.
“This is turning into a situation where the consumer is the main product of the buy it now, pay later industry,” said Nandan Sheth, CEO of payment company Splitit, which offers an installment payment service. white label” to merchants, meaning it adopts customers. ‘ mark rather than using its own. “Certainly, this is not good for the consumer, but it is terrible for the retailer. Merchants have spent countless hours and lots of money to acquire the consumer and retain them, just to see that consumer being registered by a payment brand, and then a variety of cross-selling activity based on their purchase history who may not land return them to the merchant from whom they were acquired.