The Buy-Now-Pay-Later economy – Where are we?

In the current economy, not everyone can afford all the items they want or need. Some of these individuals are unable to qualify for credit cards, while others are unsure of the impact of using credit cards — both may be searching for other options to finance their purchases. Buy-Now-Pay-Later (BNPL) programs are now being presented as a viable solution in this arena.

BNPL programs are a financing option that allows consumers to make purchases and pay for them over time, typically in a series of installments. These programs have become increasingly popular, especially with online shopping. Some key features of BNPL programs include:

• • • Immediate purchase — Consumers can buy a product from participating stores or small businesses without paying the full price upfront. This is especially important if the item is necessary or in short supply.
    • Installment payments — The total cost is divided into smaller, more manageable payments, usually paid bi-weekly or monthly.
    • Interest and fees — Some BNPL programs are interest-free if payments are made on time, while others may charge interest or late fees if payments are missed.
    • Approval process — Approval for BNPL is generally quicker and easier than traditional credit, with many services requiring only a soft credit check or basic personal information.
    • Flexibility — Purchases through BNPL programs can be used for a wide range of products and services, from clothing and electronics to travel and home improvement.

Popular BNPL providers include companies like Afterpay, Klarna, Affirm, and Sezzle. Each company has its own standards and practices, and terms are usually presented prior to completing the loan. While these programs can make it easier to afford larger purchases, it’s important for consumers to be aware of the terms and conditions, including any potential fees or interest, to avoid accumulating debt.

When discussing BNPL, the most frequently cited danger is over-extension of the user’s finances. Because these programs do not immediately report to credit bureaus, it is easier for the user to overspend or take on more loans than they are comfortably able to pay regularly. When stacked on top of one another these payments can become incredibly expensive.

BNPL, unlike standard credit cards, may not guarantee protection for issues with the initial purchase. If a BNPL-program customer is scammed or needs a return, that process is solely at the discretion of the seller. This means that the buyer may bear the burden of the loss and still could be responsible for paying for an item that does not function or that they may not have received.

Regulation of BNPL programs

In the United States, credit cards are regulated by several entities to ensure they operate fairly and transparently, and much of the responsibility for managing problems with consumers is on the credit card companies, which often must bear the burden of loss in order to protect individuals.

While BNPL providers are subject to various regulations and oversight, the specifics can vary by country and region. Some of the key points regarding the regulation of BNPL providers include:

• • • Consumer protection laws — In many countries, BNPL providers must comply with consumer protection laws that ensure fair treatment, transparency, and protection against unfair practices. These laws may require clear disclosure of terms, fees, and interest rates.
    • Financial regulators — Depending on the jurisdiction, financial regulatory bodies may oversee BNPL providers. For example, in the US, the Consumer Financial Protection Bureau (CFPB) has expressed interest in regulating the BNPL sector to ensure consumer protections; while in the United Kingdom, the Financial Conduct Authority (FCA) has been reviewing BNPL products and may impose regulations to protect consumers.
    • Credit reporting — Some BNPL providers report payment history to credit bureaus, and in such cases, the BNPL providers may be subject to regulations governing credit reporting and responsible lending practices.
    • Advertising and marketing — Regulations may also govern how BNPL services are marketed to ensure that advertising is not misleading and that consumers are fully informed about the terms and potential risks.
    • Data privacy — BNPL providers must adhere to data privacy regulations, such as the European Union’s General Data Protection Regulation (GDPR) to protect consumers’ personal and financial information.

It is important to remember that not every BNPL program is responsible for adhering to all regulations. Credit card companies are generally more heavily regulated than BNPL companies, but the regulatory landscape for BNPL services is evolving and becoming more stringent as these services become more widespread.

While BNPL services offer convenience, it’s also important for consumers to understand the programs’ terms and conditions and to be aware of the regulatory environment in their specific region to ensure their rights are protected.

Regulatory scrutiny is increasing, and some countries are beginning to implement or consider regulations specifically targeting BNPL services. As mentioned, the CFPB has started to look more closely at BNPL providers to ensure they are transparent and fair to consumers and may also begin taking steps to regulate BNPL in the same way that credit cards are regulated. This move would provide protection for the customers in cases of fraud and scams and would also provide more consistency in regard to the programs’ terms and conditions.

While this increased transparency may come at a snail’s pace, it surely will be a step in the right direction to help create a sustainable area of consumer financing.