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U.S. lawmakers have placed the rapidly growing buy now, pay later (BNPL) market on their regulatory agenda, discussing for the first time in Congress concerns related to data collection and credit reporting practices of BNPL companies.
The U.S. is no exception to the global trend for rapidly growing buy now, pay later. Witnesses at the House hearing titled Buy Now, Pay More Later? said the product has reached 45m people in the U.S., who spent $24bn using the service last year, and reports estimate that the value of transactions made through BNPL apps will grow to nearly $100bn in 2021.
In California, where BNPL products are treated as consumer loans that require a state license, regulatory data shows that the top six BNPL lenders accounted for 91 percent of the total consumer loans originated in the state.
“Thus, it is clear that to the extent there are risks within the BNPL market, they exist on a wide and growing scale,” Marisabel Torres, director of California Policy, Center for Responsible Lending, told the members of Congress.
Although in many jurisdictions BNPL products fall outside the perimeter of traditional financial regulations, the U.S. has a complex multi-layered regulatory system. This means the extent to which regulation applies to BNPL providers will depend on their business model.
As many BNPL financing services are provided by nonbank financial companies, they are not regulated as banks for safety and soundness. However, there are various state laws and federal consumer protection and data security laws with which they need to comply.
At the federal level, they fall under the jurisdiction of the Consumer Financial Protection Bureau (CFPB), which recently confirmed that it continues to monitor the developing market.
At the hearing, Congressman Stephen Lynch (D-MA) also noted that although large financial market players, such as Visa and Mastercard, are entering into the BNPL arena, there is little known about how these companies collect and use data.
In her testimony, Lauren Saunders, associate director of the National Consumer Law Center, confirmed it is not always clear how data is used or shared and recommended Congress amend federal laws, such as the Gramm-Leach-Bliley Act and the Fair Credit Reporting Act, to make sure data is used in ways consumers expect it.
Impact on Gen Z
Concerns were also raised about the consumer credit reporting of BNPL companies as many of these financing services are not required to report information regularly to consumer credit bureaus.
Congressman Ritchie Torres (D-NY) questioned whether it is a fair practice that BNPL providers report late payments to credit bureaus, while they do not report if a consumer pays in time and in full.
This can be particularly detrimental to young consumers who have a thin credit file and cannot build up good credit scoring because there is no regular obligation for BNPL providers to report data. On the other hand, a recent survey found that 72 percent of those who missed a BNPL payment saw their credit scores drop.
In addition, Congressman Torres highlighted the fact that although millennials and Gen Z customers make up the vast majority of BNPL users, there is no regulation that would limit the use of the product to adults.
In response to his question, Penny Lee, CEO of the Financial Technology Association (FTA), said the average cohort of its members is between 18 and 35, but she could not confirm whether there is an age limitation to use BNPL services. She was also elusive about whether FTA members, which include AfterPay and Klarna, would support a regulation that sets a minimum age requirement for the use of the service.
Pointing to the fact that BNPL companies charge merchants for a fee at the point of sale and collect fees from consumers in the event of late payment, Congressman Torres was considering whether the removal of late payments would mean that BNPL providers would not be able to operate with a profit. According to Lee, this could be a viable model, as there is a huge potential for growth in the product. Although $24bn spending in 2020 sounds like a large number, it only represents 2 percent of the overall online retail spending in the U.S., she said.
In her testimony, witness Torres included further recommendations for the CFPB to collect data from the largest providers to better identify risks within the market and urge states to require BNPL providers to obtain state licenses.
The National Consumer Law Center asked Congress to make sure BNPL products have the same requirements as credit cards regarding chargeback, reasonable and proportional penalty fees, ability to repay, and disclosures.
