Posted by Post Authored By: Kasim Carbide, Esq.
The Buy Now Pay Later (“BNPL”) model has not only caught the attention of the younger generation due to its convenience, but also from the Consumer Financial Protection Bureau (“CFPB”), which has prompted scrutiny and raised eyebrows. The BNPL model like a payment plan allows consumers to make purchases of large ticket items, but only pay small monthly payments over a specified time period, rather than coughing up a lump sum during the initial purchase. Unfortunately, however, for most consumers, the BNPL operates similar to an iceberg. That is, the tip of the BNPL assures consumers can afford costly large ticket items, while underneath the surface lurks hidden fees, costs, and expenses.
Due to the novel approach and the current lack of meaningful regulation, BNPL companies have proliferated and operated on a somewhat predatory approach. Recently, the CFPB has taken note and is now actively monitoring the current providers (i.e., Affirm, Afterpay, Klarna, Paypal and Zip), presumably to provide its forthcoming guidance and regulation.[i] This blog post will briefly cover the law surrounding BNPL companies, the pain points to consumers, and recommendations and suggestions of regulation to help curb the predatory nature of these companies.
Soon after releasing a statement vowing to “take action” against BNPL providers, the CFPB in January released a public statement requesting public comment from consumers and merchants on their experiences with BNPL models and providers.[ii]
Law
The United States closely watches lenders and strictly regulates the money lending industry, and BNPL providers operate almost exactly like an up-front loan.[iii] In essence, these companies operate act as quasi-lenders by accepting a large payment over time in small chunks. If a payment is not made on time by the consumer, then the consumer potentially triggers late charges, interest, and additional negative consequences.
These providers are described as quasi-lenders as the typical financing rules are not applicable: no hard credit inquiry is performed, and the standard cost of credit disclosures often included with personal installment loans are not included with BNPL “loans”.[iv] Furthermore, these BNPL loans often lack the consumer protections that typically apply to credit cards, where for example, if the goods you purchased are faulty the consumer has dispute protections.[v]
While there is no consensus currently whether these services are considered a payment service, or a form of credit, and such distinction is important, it is widely accepted that such providers must be licensed in the states in which they operate.
Recommended Approach
Many other countries continue to grapple with BNPL models, but Sweden in particular seems to have found a novel approach: present consumers with a multitude of options that do not contribute to debt, first, before presenting BNPL options.[vi] I would recommend the US approaching such models with the same approach, but further provide consumers with the hidden late fees and surcharges that would trigger upon default up front in plan English. By approaching this new industry with transparency, consumers would not only have full disclosure up front, but should they choose to pursue an option involving debt, the BNPL providers would not be viewed as predatory.
In other words, many US consumers would not be able to disclaim their ignorance of the hidden fees for BNPL models, and would knowingly accept an option with debt. While some BNPL providers may argue that this approach may decrease their revenue, I would argue that US consumers accept high interest credit cards and mortgage financing with the full understanding the debt they face, and BNPL models should be no different.
While the option to purchase a want with a convenient payment plan is a great option, consumers should be armed with knowledge up front so that their impulse buys are made with the understanding of the consequences that accompany such options.
[i] Consumer Financial Protection Bureau Opens Inquiry into “Buy Now, Pay Later” Credit, Consumer Financial Protection Bureau. Available at: https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-opens-inquiry-into-buy-now-pay-later-credit/.
[ii] Our Public Inquiry On Buy Now, Pay Later, Consumer Financial Protection Bureau. Available at: https://www.consumerfinance.gov/about-us/blog/our-public-inquiry-buy-now-pay-later/.
[iii] Robert Farrington, The Dangerous Rise of ‘Buy Now, Pay Later’ Offers, Forbes. Available at: https://www.forbes.com/sites/robertfarrington/2021/08/17/the-dangerous-rise-of-buy-now-pay-later-offers/?sh=4f499f1b2d14.
[iv] What is a Buy Now, Pay Later (BNPL) Loan? Consumer Financial Protecion Bureau. Available at: https://www.consumerfinance.gov/ask-cfpb/what-is-a-buy-now-pay-later-bnpl-loan-en-2119/.
[v] Id.
[vi] Ellen T. Berge, Andrew E. Bigart, & Jonathan L. Pompan, The Buy-Now-Pay-Later Boom Gets Consumer Protection Attention, Venable, LLP. Available at: https://www.allaboutadvertisinglaw.com/2022/02/the-buy-now-pay-later-boom-gets-consumer-protection-attention.html.
About the Author:
Kasim Carbide concentrates his practice in Corporate Law, Bank Secrecy Act/Anti-Money Laundering Compliance, and counseling FinTech startups. When he is not reading or billing, Kasim enjoys cooking, watching the Office, and playing Catan with family and friends.