The rapid rise of the buy now / pay later industry caught the attention of Congress on Tuesday as lawmakers weighed the possible benefits and risks of the emerging payment method.
Democrats were relatively skeptical of BNPL lenders, whose short-term installment loans, typically offered through merchant websites, have grown in popularity during the pandemic. At a House hearing, they questioned whether the products risked falling behind on loan repayments and urged regulators to review the sector.
Representative Maxine Waters, the Californian Democrat who chairs the House Financial Services Committee, said the Consumer Financial Protection Bureau should “thoroughly examine” BNPL’s lenders and fully understand their products.
Republicans were more interested in the nascent industry, warning of stuffy products some consumers see as offering a more flexible financing option than credit cards.
The hearing offered insight into upcoming regulatory debates around buy it now / pay later, the growth of which has guest adjustments by heavy goods vehicle credit card and statements questions on the Biden administration’s likely approach to regulation. Companies likely to be affected include PayPal and Square, which buys Australia-based Afterpay, as well as Affirm and Klarna.
The hearing gives CFPB “the political cover needed to move regulation forward and take enforcement action in this space,” wrote Jaret Seiberg, an analyst at the Cowen Washington Research Group, in a note to clients. The CFPB is likely to impose a requirement on BNPL’s lenders that would require them to assess clients’ ability to repay a loan before borrowing, he wrote.
At the hearing, the BNPL industry was represented by Penny Lee, CEO of the Financial Technology Association, which counts Afterpay and Klarna among its members.
While BNPL’s lenders are already subject to several federal and state regulations, policymakers should opt for “balanced and thoughtful regulation” that benefits consumers, she said.
Interest-free or low-interest products from BNPL lenders are more transparent than credit cards, Lee said, arguing that revolving lines of credit can trap consumers in a “vicious cycle of debt” as their charges fall. interest is increasing. Only 3% of BNPL customers were charged late fees, she said.
In light of this data, Rep. Blaine Luetkemeyer, R-Missouri, said, “Let’s not exaggerate the problem here and throw the baby out with the bathwater.”
“It’s a very, very good way to allow people to buy products, to pay for them in a timely manner because they can afford them,” he said.
Policymakers need to understand all the risks and benefits, but must “avoid punishing new products” for not fitting into the existing regulatory framework, said Representative Warren Davidson, R-Ohio. “The exponential growth of these alternative financial products clearly shows that consumers want them,” he said.
But consumer advocates who testified before the House FinTech committee task force urged regulators to take action.
A recent Credit Karma survey find that 34% of consumers who have tried a BNPL loan have fallen behind on one or more of their installment payments, said Marisabel Torres, California policy director at the Center for Responsible Lending.
“While these products may seem straightforward, consumers and policy makers alike need to ask: what’s the catch? Torres said. “We need data to understand what they are, their prevalence and whether additional protections are needed. “
House Democrats questioned why BNPL lenders were not reporting customer repayment history to credit bureaus, which could help borrowers improve their credit scores and allow some consumers to qualify for a traditional credit. Democratic lawmakers have questioned whether legislation is needed to require BNPL companies to make such reports.
But Lee of the Financial Technology Association said the industry is in active conversation with credit bureaus about how to share repayment data and the nuances involved. These nuances include making sure that credit bureaus don’t blame customers for frequently using BNPL products if they make consistent payments, she said.
“These are new products,” Lee said. “We want to make sure the credit bureaus understand them correctly. “