The regulator relies on “loan stacking” with “buy now, pay later” firms


Buy now, pay later (BNPL) services are growing by leaps and bounds, but the lightly regulated industry could end up doing more harm than good to consumers, according to a new US government report.

BNPL lenders offer consumers the ability to pay for purchases in interest-free installments over a relatively short period of time; four payments in six weeks is common. This type of financing is popular with people who cannot access traditional forms of credit, and lenders will offer larger and larger credit limits if borrowers show solid repayment patterns. The services are designed to be easy to use and often integrate seamlessly with online checkouts, making it almost too easy for consumers to get a new loan.

However, unlike banks and credit card companies, BNPL’s lenders only perform limited credit checks, and they don’t know if new users already have credit on competing services. A US Consumer Financial Protection Bureau report released last week warned of the risk of “loan stacking,” where individuals risk overextending themselves by borrowing from multiple BNPL firms. The CFPB report, which covered five major lenders – Affirm, AfterPay, Klarna, PayPal
and Zip – found that in the last quarter of 2021, 4% of users across the five surveyed platforms had taken out 10 or more BNPL loans, a warning sign that consumers may be using the services for non-essential expenses they don’t care about can afford. In 2021, apparel accounted for half of the volume of BNPL companies surveyed.

“Other financial obligations of that consumer are not taken into account,” says Nadine Chabrier, senior policy counsel at the Center for Responsible Lending. “Imagine you have 10 different payment due dates throughout the month, plus your regular bills. I think that’s a concern for a consumer when they might not have had enough money to buy that product upfront.”

When users miss their payments, three of the five companies charge late fees. In 2021, 7% of loans from these three companies triggered such fees. According to the report, “virtually all” BNPL users have auto-payment enabled on their installment plans, with most paying with a connected debit card. This suggests that borrowers are not forgetting their payments but have no available funds in their accounts.

While the majority of BNPL loans are paid for with debit cards, individuals have the option of paying with credit cards. That increases the risk for leveraged borrowers by allowing them to pay for loans with loans. In 2021, 10% of BNPL installment payments were made with credit cards. If the cards aren’t paid off in full, users will face interest charges, which average 18.10% in the US, according to Bankrate.

Lending to riskier customers has started to weigh on BNPLs’ margins as loan default rates have risen, particularly after the Covid-19 stimulus programs end. In response, each of the five lenders surveyed reported falling loan approval rates. The firms have also lowered late payment fees in response to the increased scrutiny. Additionally, increased competition in the BNPL sector has lowered the fees merchants pay to companies.

As two main sources of revenue – merchant and late payment fees – shrink, BNPLs are looking to diversify their revenue streams. A way has expanded their own online e-commerce businesses. Sales generated by retail referrals account for 0.32% of surveyed BNPLs’ sales, double the amount from two years ago, CFPB data shows. BNPLs are in a unique position to collect customer payment data across retailers that could be used for sponsored ad placements or offering custom discounts either to retailers or to promote BNPL companies’ online malls.

In prepared remarks, CFPB director Rohit Chopra said the regulator plans to develop and enforce commercial surveillance rules.

Neither the CFPB nor merchants will be happy if BNPL providers use consumer data to promote their own online businesses. It is to be expected that traders will balk as their customers are lured away from their own tills to BNPL marketplaces.

“A situation is developing where the main product of the buy-now, pay-later industry is the consumer,” said Nandan Sheth, CEO of payments company Splitit, which offers merchants a “white-label” installment payment service, meaning that it adopts customers’ branding rather than using one of its own. “It’s certainly not good for the consumer, but terrible for the retailer. The merchants have invested countless hours and large sums of money to win over the consumer and make them loyal, only to see that consumer being registered by a payment brand, and then a variety of cross-selling activities based on their purchase history, who may not end up returning them to the retailer from whom they were purchased.”


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