Debt danger with buy now, pay later

Technology | Steven Harras 18 Nov 2021

Eestablished companies such as The Goldman Sachs and Mastercard are diving headlong into a financial technology product that critics fear poses risks to consumers.

The service, known as "buy now, pay later," or BNPL for short, is a twist on the old-fashioned layaway plans once offered by retailers.

The difference is that consumers get their goods right away, and many of the plans may come from their financial companies, not the sellers.

Mastercard said that it is launching a service that will provide customers with a flexible way to pay online or in store through interest-free installments. The Mastercard Installments BNPL program will be offered in the Unites States, UK and Australia.

PayPal recently acquired Japanese startup Paidy for US$2.7 billion (HK$21.06 billion) to deepen its BNPL offerings. Goldman Sachs and Apple are launching a BNPL service called Apple Pay Later.

The payment model has grown in popularity since the onset of the Covid-19 pandemic, allowing consumers to divide their purchases into several smaller - usually four - interest-free payments, which are made biweekly or monthly until the balance is paid in full.

Most charge late fees for missing payments.

Experts say the rapid expansion is sure to draw the attention of regulators.

"The BNPL space is growing fast. When it comes to credit, consumers gravitate to options that make their choices easy and the processes simple, and BNPL does both," said Jo Ann Barefoot, a former deputy comptroller of the currency and Senate Banking Committee staff member who now leads the Alliance for Innovative Regulation.

"Those very traits, however, raise concerns among advocates and regulators, so regulatory focus is growing commensurately with the growth of these products."

Ted Rossman, a financial analyst at and, said BNPL is popular because the fixed installments "provide a light at the end of the tunnel" that both feels better to consumers and can save them money compared with a credit card purchase - especially if they're making only minimum payments on the latter at an average 16 percent interest rate.

Another benefit is that approval for a BNPL service, which can be done during an online checkout or through a mobile app, will take only a few minutes and generally doesn't involve a hard credit inquiry.

Hard inquiries are typically made by lenders after a consumer applies for credit and impact a person's credit score because they may indicate the consumer is applying for more credit.

Most BNPL providers require identity-validated applicants only to declare they are at least 18 years old, have a mobile phone number and possess a debit or credit card to make payments.

Retailers are also increasingly embracing the model, said Penny Lee, CEO of the Financial Technology Association. She said they may see it as a pathway to a growth in sales, more repeat purchases, higher customer conversion rates, increased brand engagement and greater customer satisfaction.

"BNPL provides small and medium merchants a platform to compete against large online marketplaces and build a direct relationship with the consumer," she said.

Data from FIS Worldpay put the BNPL market at US$60 billion globally in 2019, or 2.6 percent of e-commerce, excluding China. It estimated that the option could grow to US$166 billion by 2023.

Experts warn consumers there may be downsides.

"Debt is debt, and BNPL is debt that is very easy to incur and easy to forget when managing your personal finances," said Todd Baker, a professor at the Columbia University law and business schools.

"It adds significant complexity to the stressed financial lives of already over-levered consumers with debt obligations for mortgages, credit cards, auto loans and personal installment loans."

Late fees are another potential peril, Rossman said, pointing to research showing 43 percent of users of such services have paid late at least once over the past two years. Small amounts such as US$10 may not feel like a lot, "but they can add up at scale," he said.

Barefoot cautioned that such loans may actually compare unfavorably with other options, which people could find if they took the time to search - "but typically don't."

"There is concern that the borrower's decision is fast, with no 'pause for thought,'" she said.

"The desire for instant gratification can dominate the decision-making process, because the consumer really, really wants the thing they're buying."

Sezzle, a fintech company that offers small installment loans for online purchases, last year settled an enforcement action with the California Department of Business Oversight. State regulators concluded that Sezzle was making illegal loans under California law. They demanded that the company refund US$282,000 to consumers and pay a nearly $30,000 penalty.

AJ Dhaliwal, special counsel at the law firm Sheppard, Mullin, Richter & Hampton, said whether BNPL products could be considered lending wasn't really a question until regulators deemed they were "loans" - even though the common understanding of the relevant statutes and case law likely wouldn't have yielded the same legal conclusion.

He said there are growing concerns among regulators that the service "represents a significant potential harm" in terms of a perceived lack of consumer understanding of the risks - "which could lead to overindebtedness, and all of which are exacerbated by the speed and convenience of these platforms and consumer demand."

Industry observers expect to see greater regulation. Barefoot, Baker and Rossman see the Consumer Financial Protection Bureau as likely taking the lead at the federal level.

Baker said providers "would prefer to be ignored," based on the idea that they're not really lending at all, but that's an "unlikely outcome, given the size of the BNPL industry and the significant late fee and collection activity associated with the product."

CQ-Roll Call (TNS)

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