Behind the American boom “Buy now, pay later”, the federal regulator is looming

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As more Americans are expected to buy gifts by buying now, paying for services later this holiday season, the nation’s consumer credit watchdog may look to the tools of existing law to soften it up. the edges of the largely unsupervised industry.

Despite calls for specific new regulations, buy now, pay later, businesses – which have exploded in popularity since the start of the pandemic – must already comply with federal and state laws on fair loans, credit reporting and the fight against money laundering. The Consumer Financial Protection Bureau’s pending payday loan rule could also be invoked.

Growing businesses are “regulated at the federal and state levels, so they have regulations to follow,” said Rachel Gittleman, director of financial services for the Consumer Federation of America. But she added: “I would expect there to be more guardrails there and more surveillance.”

Rohit Chopra, the new CFPB director, has promised aggressive enforcement of federal consumer credit laws and could use existing powers to control the market, even though federal regulators have taken a largely passive approach to the industry.

Takeoff reached

Buy now, pay later has been a big part of the consumer spending landscape in Australia, the UK, and parts of Europe for years, but has started to gain momentum in the US in 2020 as people trapped at home shopped online during the pandemic.

Consumers around the world spent $ 500 billion on products in 2020, a 28% jump from the previous year, according to an October report from the Aite-Novarica group. This is expected to rise to $ 1.2 trillion by the end of 2024, although Aite-Novarica said the growth could be even higher as even more American consumers use the products.

“This is not new and it will not go away,” said Ginger Schmeltzer, strategic advisor at Aite-Novarica and co-author of the report.

The most popular model is the Four-Way Payment, where a purchase can be split into four equal payments over six weeks. And giant retailers, banks, and payment companies are all jumping into the act.

Amazon Inc. agreed to allow customers to use Affirm at checkout as part of a major expansion of Buy It Now and Subsequent Payment services in August, joining Walmart Inc. and Target Inc.

Many buy now, pay later, companies like Affirm and Afterpay host their own online marketplaces where consumers can buy directly from companies like Adidas and Gap Inc.

Companies from PayPal Holdings Inc. to Apple Inc. to Chase Bank NA have all entered the buy now, pay later market or have announced plans to do so in recent years. In August, payment processor Square Inc. announced the acquisition of Afterpay for $ 29 billion.

Satisfied customers

Millennials and Gen Z consumers are responsible for most of the growth in usage, and 44% of U.S. consumers have used the services, according to a September study by Credit Karma. Of these, 75% used the services more than once.

Businesses are promoting themselves as safe alternatives to credit cards. Users know how much they’re going to pay every few weeks and don’t have to pay interest if they’re late.

“On the surface, there is nothing wrong with it,” said Colleen McCreary, consumer finance lawyer for Credit Karma. “It’s a great financial tool to have in the toolbox. ”

Several large market players, like Affirm, do not charge late fees, instead preventing consumers from using the service when they have unpaid fees. Others, like Afterpay and Klarna, cap late fees. Afterpay also prevents consumers from using the service when they miss payments.

“BNPL companies make the most money through partnering with retailers, not consumer fees,” said Penny Lee, CEO of the Financial Technology Association, which includes Afterpay and Clarna as members. “Less than 15% of revenue comes from late fees from consumers. “

“Their model is based on frequency, on customer satisfaction,” said Lee.

Complaints about companies in the field were almost non-existent.

Consumers filed 426 complaints against Affirm, Afterpay, Klarna and Sezzle in the CFPB consumer complaints database between January 1, 2019 and November 10, 2021. The CFPB received a total of 1.1 million complaints against of financial companies during this period.

Risks for the consumer

But some problems emerge. Credit Karma found that 34% of users are behind on payments.

Klarna and Afterpay face class action lawsuits alleging they failed to warn consumers of potential overdraft fees, typically $ 35 each time a creditor attempts to withdraw from a consumer’s bank account.

“They are teaming up with this younger generation that is already under siege and in debt,” said Gittleman of the Consumer Federation of America. “Is this the best opportunity for people? ”

The Federal Truth About Lending Act does not apply to many services because it only covers credit products that involve five or more payments, more than the popular four-payment model.

The services do not make a rigorous subscription. They often perform “soft” credit checks that involve checking the balance in the consumer’s bank account. While such checks don’t hurt a consumer’s credit rating, they also may not reveal unpaid debts.

Customers are also responsible for keeping track of when overdue payments are due. And while missed payments can hurt a consumer’s credit rating, on-time payments won’t help.

Major credit bureaus can’t model short-term payments like those in the four-way payment model, Lee said.

Buy Now, Pay Later, companies are working with consumer credit bureaus to find ways to incorporate a positive payment history into their credit reports, Lee said at the House Financial Services Committee hearing on the 3rd. November.

Consumer advocates and Democratic lawmakers, including House Financial Services Committee chair Maxine Waters (D-Calif.), Are urging the CFPB to address these issues.

“All of this reinforces the need for the Consumer Financial Protection Bureau to use its authority to identify and address the risks they pose to consumers,” Marisabel Torres of the Center for Responsible Lending said at the hearing.

Application tools

Chopra has pledged vigorous enforcement of consumer credit laws and could take steps to make the biggest buy now, paying subsequent companies under CFPB oversight using a so-called “biggest participant” rule. paying later in developing new rules can be difficult.

“It just seems like there is a signal there that great regulation may not be coming,” said Bryan Schneider, the former head of the Oversight, Enforcement and Administration division. fair loans from CFPB.

The CFPB can already sue buy now and pay later companies under the Equal Credit Opportunity Act, a key fair lending law, as well as the Electronic Credit Transfer Act. funds and other federal consumer credit laws. The office also has broad power to bring enforcement actions against Unfair, Deceptive and Abusive Acts and Practices (UDAAP) of the industry.

The Federal Trade Commission also has the power to buy now, to pay businesses later, although its powers are much more limited.

Both regulators could target deceptive advertising practices, including how companies claim the service will affect consumers’ credit, Schneider said.

“Are you telling people it will help you build your credit and then not reporting it to the rating agencies?” ” he said.

The CFPB could also use guidelines and other tools to standardize disclosures of fees and other items.

Buy now, pay later, businesses could also be covered by the CFPB’s pending payday loan rule, which requires lenders to obtain permission to access a consumer’s bank account in order to collect payments.

Buy Now, Pay Later Companies point out that their products are nothing like the high-interest credit issued by payday lenders and vehicle title lenders. But the CFPB rule covers all short-term installment loans with 45-day repayment terms. The four-way payment model typically allows consumers to pay back over a six-week period, but without any interest charges.

Katherine Adkins, chief legal officer of Affirm, said it was “possible” that the pay rule, which is currently the subject of litigation by payday lenders, would apply to the company.

Companies in the industry need to make sure their systems comply with the rule, just in case, Schneider said.

While it is not clear what CFPB’s plans are for the buy now, pay later sector, the office has been in discussion with the industry.

“Afterpay works closely with CFPB to broaden its understanding of the needs of consumers in this rapidly growing customer base,” said Damian Kassabgi, executive vice president of public policy at Afterpay.

States also have the power to regulate buy now, pay later, and many require them to register as lenders in order to operate. This means that state equity loans and other laws can come into play.

“People forget that there is actually a law that applies,” said Catherine Brennan, partner at Hudson Cook LLP.


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