Buy Now Pay Later (BNPL) plans are increasingly being offered as a convenient credit alternative that allows purchases to be made in installments, typically four payments over six weeks. The so-called “fintech” companies that offer these plans often advertise them as offering consumers interest-free payments with no impact on credit scores.
But consumer groups and economic justice organizations point out that these financial products, which already affect 8.42 million consumers, may be just another explosive form of predatory lending that exploits unsuspecting consumers through a lack of transparency that is generally It generates confusion about the true terms and the consequences that follow. with the product. Without effective regulation, BNPL could financially cheat millions more consumers.
Consumers can use BNPL offers from firms like Affirm, Klarna, PayPal Pay in 4 and Sizzle, as well as others at physical stores like Macy’s, Footlocker, Target and Walmart, and online retailers like Amazon.
BNPL purchases require direct payment deductions from credit or debit cards. Because each BNPL purchase comes with its own set of payment due dates, unlike the fixed payment date for a credit card bill, these ongoing deductions can easily lead to consumers incurring additional bank charges. assessed for insufficient funds and overdrafts. And many BNPL transactions don’t automatically come with the product returns and/or fraud protections that credit cards offer. Instead, these credit terms are currently at the discretion of the BNPL providers. As a result, consumers may end up without merchandise, while their money is still being taken out of debit or credit card accounts.
Complaints to the Consumer Financial Protection Bureau (CFPB) and the Better Business Bureau have pointed to a number of consumer issues, including lack of information on how to initiate disputes, delays in receiving refunds, and continued demand for refunds from lenders. of BNPL.
Last November, Marisabel Torres, California Policy Director for the Center for Responsible Lending, testified before Congress that BNPL loans are generally designed to avoid coverage under the Truth in Lending Act (TILA).
“That law excludes from the definition of “creditor” whoever grants a credit that does not require a financial burden and is repayable in four installments or less…. The fact that this appears to be a “free credit” product begs the question: What’s the catch? Torres said. “It turns out that there are a number of catches, some demonstrable, some potential, that require attention and regulatory response.”
Advocates say many adverse effects could be avoided if BNPL lenders were required to verify a consumer’s ability to repay before making the first loan. Instead, like payday loans, each billing cycle tends to worsen, rather than improve, the borrower’s financial position, dragging them deeper into the debt trap.
Just a month later, in December 2021, consumer and economic justice advocates applauded the CFPB when it announced it would open an investigation into BNPL’s large lenders.
“By opening this inquiry, the Consumer Bureau is taking a great first step in learning about this industry and preventing harm to consumers,” said CRL’s Torres.
Without careful monitoring and proper regulation, Torres and other advocates warn, products that promise to promote financial inclusion may instead exacerbate financial exclusion.
In March, a coalition of 77 organizations representing national consumer and advocacy organizations in 16 states and the District of Columbia sent a letter urging the CFPB to treat BNPL as a form of credit and subject lenders offering the products to regulation under appropriate consumer financial protection laws. like TILLA. This law requires responsible underwriting, fee disclosure, and the ability to dispute charged items.
Without regulation, the growing use of BNPL could bring new financial harm to consumers, especially those with fewer financial resources.
Charlene Crowell is a senior fellow at the Center for Responsible Lending.