Economic uncertainty, competition, regulators and the usual consumer debt problems are spoiling the fun for this fast-growing industry.
For three days each week in April 2014, a seasoned product manager named Lulu Young, an engineering manager named Paul Connolly, and a 24-year-old jewellery salesman, Nick Molnar, met in a windowless Melbourne conference room to hash out the features and functionality of a financial product that existed only in Molnar’s head.
The first relates to a kind of regulatory arbitrage, in which pay-in-four products bypass consumer protections designed to prevent people from getting screwed or screwing themselves. Particularly in the US, BNPL companies haven’t been subject to much of the regulatory oversight normally applicable to those extending credit.
The companies then use proprietary predictive models to assess the riskiness of lending you money to complete the transaction. Requests get approved within seconds. An email invites you to download the phone app, which lets you track the remaining three biweekly payments, which can be automatically charged to the card or account entered at checkout.
These fees from merchants make up the single biggest source of revenue for many BNPL companies, a fact they cite as proof that their interests, unlike the interests of credit card issuers, align with those of customers. Card issuers, by contrast, earn the vast majority of their revenue from fees and interest heaped onto users who don’t pay off balances in full, and on time.
“If I spend your money now, and then I pay you back with my money later, common sense would dictate that I am borrowing from you and that you are lending to me,” Ritchie Torres, a New York Democrat congressman said at a US November hearing on BNPL. Regulators in California and Massachusetts have accused BNPL providers of offering illegal loans and forced them to register as licensed lenders.
Chopra issued the request for information on BNPL companies two months after assuming office and says he expects the agency to issue its initial report on the industry before the end of the calendar year. Because it’s new, BNPL hasn’t been tested during a meaningful, economic downturn. With inflation high, money doesn’t go as far, which suggests demand for BNPL could rise, as it did for traditional lay-by during the Great Recession. But if people curb spending altogether, usage could dip. The number of people unable to repay their loans could climb. The industry is in the early stages of a defining test.
This system has long been reviled. About 106 million Americans are considered “credit invisible,” “unscorable,” or subprime and below, data shows. Poor people, people of colour, immigrants, and young people disproportionately fall into those categories and get cut off from traditional banking and the advantages it can bring.
The industry has faced accusations that it emotionally manipulates users and glamorises debt, using social media influencers to drive adoption and marketing slogans such as this one from 2018: “Broke AF but strongly support treating yourself? Afterpay is now in-store.” That will change; BNPL providers are working with the credit reporting companies to develop a system to do this. But as the CFPB has warned, this lack of reporting has prevented lenders of all sorts from seeing how much a prospective borrower may already owe others.
Sometimes there’s friction between customers and merchants. The Fair Credit Billing Act guarantees credit card users the right to file complaints about overpayments and billing disputes and requires card companies to investigate and refund any unjustified charges. There is no such framework for BNPL. Because the companies depend so heavily on revenue from merchants, there may be a financial incentive to keep them happy at the expense of customers.
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