The high-profile initial public offering (IPO) of Klarna this month has returned the concept of “buy now, pay later” (BNPL) to the treasury conversation – and to further innovations and potential risks.
With the BNPL expansion comes debate about regulation, ethics and what the popularity of the apps can tell corporate executives about the health – or lack thereof – of the US consumer.
In May, the state of New York enacted the first major regulatory framework for BNPL loans. Soon the state will have a licensing requirement, with disclosure and fair-practice rules.
BNPL loans first entered US markets under a closed-end credit structure with repayment in not more than four installments and no periodic interest or other finance charges. That framework earned certain exemptions from the federal Truth in Lending Act.
Under New York’s new law, state regulators are drafting requirements involving refunds, data sharing restrictions and other policies, according to a summary by law firm Mayer Brown.
“While more regulation may not be welcomed by providers initially, the NY BNPL Act allows for requirements that align with material concerns for BNPL providers, consumers and regulators alike without being overly burdened by a need to work across the broader scope of laws that apply to other consumer credit products,” the law firm states.
Critics of BNPL argued that targeted regulation has become necessary not only because of the popularity of the services but also because they can be yet another vehicle to lure cash-strapped consumers into more debt.
On 10th September Lending Tree said its latest survey of BNPL customers found that 41% of the users were late on at least one payment, up from 34% a year earlier. Approximately one-quarter of users had three or more BNPL loans at one time. A similar percentage said they used BNPL to buy groceries.
A separate survey by Omnisend found that 45% of US shoppers are considering using BNPL to buy holiday gifts this year.
“BNPL isn’t niche anymore,” Marty Bauer, an e-commerce expert at Omnisend, said in the survey press release on 18th September. “Last holiday set records for installment spending online. This season, the winners will be retailers who lead with price transparency [and] offer BNPL as a clearly explained option.”
The proliferation of BNPL usage comes with multiple potential pitfalls for the consumer, according to online counsellor LegalShield. Almost one-third of users are billed incorrectly and most do not understand their dispute rights. Few are aware that BNPL will soon be factored into individual credit scores.
“We’re hearing story after story of people overextending themselves, juggling payments from various loan companies and banks,” said Rebecca Carter, a LegalShield-affiliated lawyer. “It can snowball quickly into a serious financial burden.”
The BNPL providers promise more expansion. Klarna, which garnered a market value of around US$16bn in initial trading, promises to use its IPO proceeds to diversify services, including new cards and mobile phone plans. Klarna has more than 26 million users in the US.
A rival, Affirm Holdings, on 15th September announced an expansion of its BNPL service for Apple Pay users for in-store purchases with iPhones.
During Affirm’s last quarterly conference call in August, Chief Financial Officer Robert O’Hare said his company is “really focused on making sure that the cohorts that we originate today pay us back.” Approximately 95% of transactions come from repeat borrowers, improving credit-worthiness visibility.
“The most important thing for us is that we have a full picture of the borrower’s wherewithal to repay the loan at the time of origination,” O’Hare explained. “If we need to adjust the underwriting to be more inclusive or less inclusive in the future, we’ll do that in normal course.”
The Mayer Brown firm says the New York regulations will be consequential, potentially beyond the borders of the Empire State.
“Even in the absence of legislation being enacted by other states, New York may complicate matters for lenders doing business nationwide when structuring programs, given that the most common form of BNPL loans (four-installment loans with no finance charges) could soon become subject to material licensing and disclosure requirements in a state that may be too large to exclude from many programmes,” the law firm warns.
