Consumer Advocates Call for Regulation of Buy Now, Pay Later Loan Products

Credit Products Could Create Debt Traps

Andy Spears

--

The National Consumer Law Center (NCLC)recently presented testimony about “buy now, pay later” (BNPL) products before the House Financial Services Committee’s Task Force on Financial Technology. The bottom line: These products — such as AfterPay, PayActiv, and other BNPL and earned wage access (EWA) — often carry high fees/interest rates and can lead to a debt trap or persistent cycle of borrowing.

“Shiny fintech garb does not remove the need for basic consumer protections to ensure that credit is affordable, responsible, transparent, and fair,” said Lauren Saunders of NCLC. “We must keep a close eye on how products evolve, as products may not stay free or low-cost and the ultimate business model may not always be what it appears.

Buy-now-pay-later products, if affordable and truly free to the consumer, may help consumers manage larger purchases without the long-term debt and high costs of credit cards. But some BNPL products may have deceptive and abusive profit models built on the expectation of late fees from struggling consumers.

The BNPL market is exploding. Nearly every day there is an announcement about a new BNPL product or partnership. Companies with BNPL products include AfterPay (now acquired by Square), Affirm, Klarna, Sezzle, Splitit and Zip (previously QuadPay). Banks and established payments players like Capital One, Goldman Sachs, MasterCard, PayPal, and Synchrony Bank also have or are developing BNPL products. Many BNPL providers also offer traditional installment loans or other products. BNPL products are most visible in online shopping, but BNPL options are also becoming available for in-person purchases. The potential uses of BNPL are endless. For example, Gravie, which works with brokers of health care plans for employers, and Scratchpay, which works through medical providers, both offer BNPL for medical expenses. One study found that 42% of respondents used BNPL to finance home and furniture goods, followed by electronics (30%) and apparel (24%), but uses also included music festivals and luxury items.

When they operate as promoted, BNPL can help consumers manage larger purchases without the long-term debt and high costs of credit cards. There are real benefits to being able to pay on credit with clear, simple payments that will quickly pay off the purchase at no greater cost

--

--

Andy Spears

Writer and policy advocate living in Nashville, TN —Public Policy Ph.D. — writes on education policy, consumer affairs, and more . . .