If you have made a large (or perhaps even not so large) purchase from an online retailer in the past couple of years, you probably noticed the multiple payment options available to online purchasers. After you select your item, put it in your cart, and select or reject the myriad of add-on products (extended warranty coverage, subscription plans, additional accessories, items others who purchased this same item like to purchase, etc.), you eventually get to the point of paying for your purchase. But, alas, your decisions don’t end there! You are now prompted to select between another series of choices. In addition to traditional credit and debit cards, you are often able to pay via PayPal or finance the purchase through traditional installment loan products. Retailers are now also offering an alternative hybrid loan product known as a “Buy Now Pay Later” (BNPL) option to fund online purchases. Davenport Evans lawyer Keith Gauer takes a closer look at these payment methods and the changing regulatory environment.
BNPL loans are marketed through third-party providers such as Klarna, Affirm, Sezzle, and Afterpay. While there are slight differences in the models, most BNPL programs allow a customer to receive the goods or services immediately and pay the purchase price over a few weeks or months in installment payments. BNPL loans are typically “interest-free” and are advertised as a means for a buyer to make a larger purchase without using up their existing credit card lines. The BNPL lenders generally do not pull credit reports or rely on traditional credit underwriting. Rather, their models rely on online identity verification methodologies and the use of predictive algorithms to approve or deny the loan. Many BNPL loans are interest-free to the consumer borrower. Instead of interest, the BNPL providers negotiate a discount in the purchase price with the retailers. From the retailer’s perspective, the discount is justified by increasing sales without forcing the retailer to support the financing. The retailer gets paid up front and the lender waits for the borrower to make the installment payments.
While BNPL products have been flying under the radar for several years, regulators have started to express interest in these products given their success in the marketplace. According to the Consumer Financial Protection Bureau (CFPB), BNPL loan activity increased exponentially during COVID, with many consumers eschewing traditional malls and in-person shopping in favor of online purchases. While BNPL loans were initially marketed as way to pay for larger purchases, they are now routinely offered in connection with smaller dollar purchases as well.
In Washington, the House of Representatives Committee on Financial Services held a hearing in late 2021 wherein several witnesses provided testimony regarding BNPL products. Additionally, the CFPB recently issued “Orders to File Information” to several of the large BNPL providers seeking a wide range of information regarding their BNPL products, including loan volume, underwriting methods, payment terms, dollar amounts, and industries in which the BNPL loans are marketed. The CFPB and legislators’ concerns include the fact that many of the BNPL loans are outside of the scope of traditional consumer lending laws and regulations (including the Truth in Lending Act and Regulation Z). Additionally, concerns have been raised regarding the lack of credit reporting to allow consumers to build credit through timely payments and the potential “data harvesting” issues raised when BNPL lenders have access to a consumer’s online shopping behaviors and bank account information. Finally, the CFPB has noted its concern that consumers may easily become overextended when they have multiple BNPL loans at the same time.
At this point, the BNPL industry should be concerned that regulatory headwinds may be coming for their product. If your business or bank is considering participating in this industry, you should be aware of the potential risks posed by a changing regulatory environment, including enhanced scrutiny of existing products and the possibility of future regulations or interpretations that may impact the origination and servicing of BNPL loan products.