Buy now, pay later incentives increasingly offered on website checkout pages are attracting many customers, especially as the coronavirus pandemic has increased online shopping.
But the explosion in the use of buy-it-now, pay-later plans is also drawing closer scrutiny from state and federal authorities over concerns that the practice is not sufficiently regulated.
Plans allow customers to pay a small portion of the price upfront, receive the item, and then pay the rest in installments. Unlike credit cards, there are no upfront interest charges. But many consumers may not fully understand the implications of the plans, such as unexpected charges and possible damage to credit scores for late payments.
“Consumers can rack up a lot of debt without realizing it,” said Lauren Saunders, associate director of the National Consumer Law Center. “There’s no interest, but a lot of these plans have big late fees, and that can rack up more than just interest.”
California is leading the way in regulation and late last year classified buy now, pay later plans as loans, bringing the companies that offer them under the lending rules of the State. Using this expanded regulation, California officials have aggressively sued a few companies that the state says aren’t sufficiently disclosing terms or protecting consumers.
At least a handful of other states are considering whether expanded rules or new regulations might be needed. And the federal Consumer Financial Protection Bureau last month launched an investigation into companies offering buy now, pay later credit, seeking feedback from merchants who use the service, other types of creditors and consumers.
But regulators have struggled to categorize the type of products companies sell, and so are struggling to craft regulations.
Plans have increased exponentially. A September report from Accenture, a financial advisory and information technology firm, showed that the number of users buy now, pay later in the United States has increased by more than 300% per year since 2018. , reaching 45 million in 2021.
More than 37% of Americans had used a buy now, pay later service by July 2020, according to a survey by The Ascent, a product review service from investment advisory firm Motley Fool. This figure has risen to almost 56% in March 2021. As shopping plans have taken off online, physical retailers are also using them.
Most buy-it-now, pay-later plans require the consumer to split the cost of their purchase into four payments, usually made every two weeks. The buyer receives his article with the first payment. No interest is charged if the consumer pays on time. Traders pay a small commission – usually between 2% and 8% – to buy now, pay later the companies that provide the short-term funding. In comparison, merchants typically pay 1.5% to 3.5% to credit card companies for using this service.
Some of the finance companies buy now, pay later charge a fee if a customer is late with a payment. Some, but not all, report transactions to the credit bureaus.
A survey conducted late last year by Credit Karma, a financial services company, found that more than a third of respondents who had used buy-it-now, pay-later plans said they had taken late in their payments.
Amanda Pires, a spokeswoman for Afterpay, one of the most used companies to buy now, pay later with around 15 million customers, said in an email response to questions that the company is not “not a loan or credit product, which means there is no revolving debt or interest charged to the consumer. We are proud to say that 95% of transactions never incur late fees.
Late fees of up to $8 per payment can be assessed, she said, but the fee is capped at 25% of the individual order amount. If customers miss payments, they are banned from the platform until they pay, she added.
But regulators and experts dispute the argument that buy now, pay later plans are not loans. The California Department of Business Oversight alleged in 2019 that Afterpay was actually a loan company and was offering illegal loans in the state. The state reached a settlement in which Afterpay had to reimburse California consumers $905,000 and pay more than $90,000 in administrative costs. The company also had to obtain a lender’s license from the state.
Afterpay disputed the state’s claims in a statement at the time, saying it was not operating illegally. Pires wrote in an email last week that the company still stands by the statement.
She and representatives from other “buy now, pay later” finance companies are insisting that consumers use the platform as a budgeting tool, as they can calculate the bi-weekly cost of the transaction and plan spending.
California decided to regulate the companies “in short, because these products are loans,” said Adam Wright, senior counsel for the California Department of Financial Protection and Innovation, formerly the Department of Business Oversight.
“They weren’t overseen by dedicated financial watchdogs like our office,” Wright said in a phone interview. “These are loans, and they should be regulated by someone like us, under a law that gives consumers more protection.”
In 2020, California regulators granted the company buy now, pay later Sezzle a lending license after initially denying the company’s application. He approved the license after Sezzle, who had previously operated in the state arguing he did not need a license, paid a $28,000 fine and reimbursed the Californians $282,000.
Penny Lee, CEO of the Financial Technical Association, which represents a number of buy now, pay later companies including Afterpay, Klarna, Sezzle and Zip, said its members are working with regulators, both state and federal, to ” ensure that standards are met and comply with all regulatory rules.They want to ensure that there is transparency in the market.
She said the companies have safeguards in place to ensure consumers aren’t overburdened, including “suspending” their accounts or cutting them off if they fail to make payments on time. “They want consumers to have a good experience with this product,” she said in a phone interview.
Affirm, one of the biggest companies with some 17 million transactions since its launch in 2012, recently expanded its offerings beyond the standard model of four installments every two weeks. The company also offers monthly payments and charges interest on purchases of certain big-ticket items such as furniture, according to spokesman Nicholas Fisher.
Late payments are reported to credit bureaus on some of their products, he wrote in an email. “It allows consumers to build their credit history while providing information that will hopefully encourage responsible risk managers not to overstretch the consumer.”
Despite corporate efforts, several states are considering how to regulate these new products.
A spokesperson for Oregon’s Division of Financial Regulation, Mark Peterson, wrote in an email that the department continues to “monitor these types of consumer financing options and assess concerns as they arise. matters of consumer protection. We are part of many [state] regulatory bodies that are considering other actions in this space, such as creating state statutes that provide regulatory oversight for these kinds of options.
Lucinda Fazio, director of consumer services at the Washington State Department of Financial Institutions, said it’s difficult to assess whether buy now, pay later companies are lenders.
Many products circumvent a state law designed to oversee retail installment sales and contracts, such as auto loans or household loans, that contain interest charges, Fazio said in a phone interview. . “And each state enforces this law differently. In Washington State, in our agency, we don’t [use] this law” with businesses buy now, pay later.
Massachusetts requires small loan companies and retail installment finance companies to hold a state license. The state classifies Affirm as a small loan company, but had not classified the other large buy now, pay later companies in any way as of Oct. 1, the last date for which a list is available. A Massachusetts Office of Consumer Affairs and Business Regulation official would not explain why other companies that buy now, pay later don’t fit the definition.
Similar to the Afterpay case in California, Affirm entered into a consent agreement with Massachusetts regulators in July 2020 after allegations that it engaged in unlicensed lending service activity. The company paid a $2.25 million fine and agreed to register for a license.
The Consumer Finance Protection Bureau’s survey includes insight into state actions, said Laura Udis, program manager for small-dollar and installment loan markets at the agency. “These companies are now licensed as consumer credit lenders in California. I think many states look at this in terms of applying different state laws.