In January 2022, the CFPB opened an inquiry into “Buy Now Pay Later” (BNPL) companies. Specifically, the consumer watchdog issued orders seeking to collect pertinent information on the risks and benefits of these companies’ modern-day layaway-like business model. [1] While the convenience of BNPL companies is attractive for consumers, several regulatory agencies are concerned about the data harvesting associated with these transactions as well as the regulatory disclosures that these companies must comply with. While consumers may not view their transactions with the BNPL companies as loans, that’s what they essentially are. And these loans were heavily beneficial to companies who offered these payment methods as well as investors who saw the opportunities for growth in this sector. Afterall, BNPL BNPL appears to increase conversion rates between 20% and 30% and boosts average ticket sales between 30% and 50%, according to RBC Capital Markets.[2] The coronavirus pandemic led to a rapid growth for the BNPL sector as many consumers were experiencing the loss of jobs, and other lifechanging events. However, since the beginning of 2021, the BNPL stocks have plummeted. This trend is clearly reflected by Afterpay shares dropping 30% since the start of 2021, and Zip shares ending the year with shares down by 25%. [3]
Despite its benefits and apparent convenience, consumers have a heavy burden to bear. Reports have shown that 30% of BNPL revenue stems from “Bad Debt”. In other words, the debt incurred by consumers when they use BNPL companies is debt used for consumption as opposed to wealth creation. [4] According to research and markets, there’s also a clear connection between users with very high credit card balances and those who chose to make BNPL purchases. Furthermore, about 40% of consumers take out a BNPL loan to purchase items they cannot even afford simply to avoid credit card debt. [5] This trend, which may leave to long-term impact on the credit history of consumers, is the key reason why there is a push for regulation in this area. Currently, BNPL companies are not regulated in the same way that consumer credit cards are. These companies don’t have to adhere to the same disclosures regarding fees, balances, credit reporting, and more. This causes confusion for consumers while the BNPL companies benefit at the consumer’s expense. Many complaints to the CFPB have noted consumer issues such as: the inability to make returns or commence a refund process, being charged unclear fees, and more[6]. These problems, unfortunately, lead to consumers defaulting on their payments because they aren’t aware of the steep penalties.
Whether these BNPL companies can continue to evade federal and state regulation will determine a lot in the years to come. Currently, BNPL Services are covered under the Dodd-Frank Act’s protections for deceptive or abusive lending practices but not the Truth in Lending Act. As the business model of these companies become clearer, and as the world begins to see more instances about how consumers ae impacted, it remains to be seen how far regulation goes and how much protection might be available to consumers and investors alike.
Lowey Dannenberg is a firm specializing in antitrust, commodities, healthcare, financial, and consumer protection law. Its attorneys comprise of a team of experienced and talented lawyers with years of experience in class action and complex civil litigation. Mitsuka Attys is a member of Lowey’s securities litigation group.
Mitsuka Attys
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[1] https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-opens-inquiry-into-buy-now-pay-later-credit/
[2] https://www.americanbanker.com/payments/list/how-regulators-worldwide-aim-to-rein-in-buy-now-pay-later
[3] https://www.cnbc.com/2021/12/17/buy-now-pay-later-stocks-tumble-on-us-regulatory-probe.html
[4] https://www.americanbanker.com/payments/list/how-regulators-worldwide-aim-to-rein-in-buy-now-pay-later
[5] https://www.fool.com/the-ascent/research/buy-now-pay-later-statistics/
[6] https://www.protocol.com/fintech/buy-now-pay-later-holidays