Buy Now, Pay Later (BNPL) services allow consumers to purchase and receive goods immediately while paying for them over time with installments, typically six to eight weeks. The industry saw an explosion of growth during the coronavirus pandemic when many people’s incomes saw a significant drop and state lockdowns necessitated purchasing online. While some BNPL products allow in-store use, the majority are utilized for online purchases.
According to industry researchers, the use of BNPL services has grown from six percent in 2019 to 36 percent in 2021, along with an increase in the number of BNPL services. The industry’s rapid growth has also surpassed certain existing credit industry regulations, causing concern and scrutiny from lawmakers, the banking industry, and consumer protection advocates.
Recent research from SEON Technologies revealed that 181 million consumers are at risk of BNPL consumer fraud in the United States. The report further states that younger generations of Americans use BNPL services more frequently, who commonly viewed the payback method as interest-free loans rather than credit, putting themselves at higher risk of excessive debt. According to SEON, those with no credit history or credit card use are more likely to perceive BNPL loans as a better option.
Some merchants are also embracing consumers’ use of BNPL options, according to industry powerhouse, Affirm, reporting that orders are up to 85 percent higher than average.
What Are Some Specific Risks of Using BNPL?
While BNPL services are convenient, there are also concerning risks associated with choosing this manner of paying for goods, such as:
- Regulation: The explosive growth of BNPL firms and how each is structured has skirted some strict federal regulations that govern the credit industry. Current laws require credit card companies to issue credit to only consumers who qualify. By not charging interest on loans, BNPL companies are not regulated in the same way, and long-term use of the service can accumulate debt that will affect consumers’ credit ratings.
- Fees: Late or missed payments for BNPL loans carry significant fees that add up quickly. The industry’s use of autopay without the ability to stop or suspend payments puts consumers with insufficient funds at risk of additional banking overdraft fees to cover the automatic payment.
- Commitment: One of the greatest risks associated with BNPL is overcommitment. The lack of full upfront payments may cause consumers to use the service for multiple purchases without realizing the combined financial impact. Many consumers find themselves overextended and unable to make payments on multiple loans.
- Habits: The ease of use and lack of immediate payment is affecting how some consumers shop. Over half of BNPL users admit to spending more than they usually do when purchasing using other methods of payment.
Retailers are also put at some level of risk as well, reputationally and financially. Customers using BNPL services who file chargeback complaints can result in the merchant losing both inventory and payment.
What Are Consumer Protection Concerns?
Financial institutions and consumer advocates are pressing for the Consumer Financial Protection Bureau (CFPB) to urge BNPL providers to make their terms and repayment policies easier to understand. Lawmakers and regulators have concern that fees for late payments, failed payments, early payoff, rescheduling payments, account reactivation, and other fees are not clear to consumers. Additionally, consumer advocacy groups point out that many consumers may find managing BNPL accounts difficult due to lack of account consolidation, differing payment schedules, and the distinct lack of clear and standard disclosures regarding late fees and default consequences.
Installment loans from BNPL companies are covered by federal and state finance laws, however, there are no uniform requirements regarding late fees and loan repayment disclosures. Due to the lack of requirements, this will result in borrower’s owing money they are unable to afford.
Additionally, most BNPL companies require autopay on loans, withdrawing payments directly from consumer’s bank accounts. They do not allow borrowers to stop payment if their accounts do not have sufficient funds. Advocates say without the ability to stop or suspend payments, consumers will incur insufficient fund fees from their bank in such instances, increasing their overall debt.
Most BNPL companies utilize a “pay in 4” model that divides loans into four payments over a period of six to eight weeks. This model, however, is not governed by the Truth-In-Lending Act regulations of disclosing fees and loan terms, as the law applies only to loans with more than four repayment installments. Some of the larger firms, such as Klarna and Affirm, do provide disclosures in line with the Act, but many other companies do not.
The Bank Policy Institute, industry lobbyists, are urging the CFPB to assert their authority on unfair and deceptive practices, forcing BNPL companies to disclose clear and honest product information.
During the latter half of 2021, the CFPB focused on the industry’s practices. They requested information from firms showing how their policies comply with federal regulation and lending laws, along with information on product design and consumer debt accumulated through product apps.
Is There Government Regulation of BNPL Companies?
Concern by lawmakers is the deliberate structuring by some BNPL firms to skirt consumer protection regulations under the TILA and are monitoring how other countries regulate the industry. For example, Sweden passed laws requiring BNPL companies to first present payment options that do not contribute to consumers’ overall debt.
Regular use of BNPL services can accumulate tremendous debt quickly, particularly if consumers increasingly use the service for more expenses, such as in-store or grocery purchases. The CFPB is also studying how companies are reporting information to credit reporting agencies. Currently, only one of the three reporting agencies, Equifax, accepts credit-related data on BNPL loans.
What Do I Need to Know When Using BNPL Services?
While using BNPL services can be risky, taking the time to educate yourself and carefully considering the loan can help you lower your level of risk. You should do the following before and while using a BNPL service:
- Research: Before agreeing to the BNPL loan, read the terms and conditions. Pay particular attention to the payment schedule, late or non-payment fees, and the autopay policies. If you do not agree with the terms, do not use the BNPL service.
- Autopay: Read the terms and conditions of the company’s autopay requirements. The majority of BNPL companies require payments be submitted by autopay directly from your bank account and do not allow you to stop or suspend payments. While this method is simpler for the company, autopay can have significant impact on your bank account, especially if you do not have sufficient funds when the payment is withdrawn, likely resulting in overdraft charges.
- Interest and fees: Most BNPL companies do not charge interest if you make your payments on time. However, most charge late fees and interest for late or missed payments, which you could end up paying throughout the duration of your loan period.
- Multiple accounts: Though BNPL services are convenient and do not require paying for your purchases in total, opening multiple accounts for multiple purchases adds up quickly. Limiting the number of BNPL loans you take can save your bank account, credit rating, and reduce fees.
- Credit rating: If you are considering BNPL loans as a method of building credit and increasing your credit rating, this is not a good idea. Most companies do not report BNPL loans to the credit reporting agencies, and Equifax is currently the only one accepting the information from BNPL companies.
Pittsburgh Consumer Fraud Attorneys at East End Trial Group Assist Clients Experiencing Buy Now, Pay Later Fraud
BNPL services are convenient and easy to use, but little government regulation, unclear loan terms, and the ability to open multiple accounts make the option risky. If you are struggling because of a BNPL loan company, one of our experienced Pittsburgh consumer fraud attorneys at East End Trial Group can determine if you have legal options. Call us at 412-223-5740 or contact us online for a free consultation. Located in Pittsburgh, we serve clients across Pennsylvania.