FAST FACTS: 

The U.S. government has begun an inquiry into BNPL in advance of potential legislation. Last week, government officials heard testimony from both sides of the aisle. Here’s the rundown of what was covered:

• Dr. Kristen Broady specifically cited Klarna as a positive example of BNPL.
• There was a large focus on determining whether BNPL providers share information with credit rating agencies. 
• Could BNPL usage allow consumers to build credit history in the future if companies start to report positive repayment? 
• Government officials inquired whether BNPL shoppers increase their spending and use these products to live beyond their means. 
• With 45 million active BNPL users in the U.S. spending about $21B in 2020, BNPL might seem to eat up a massive slice of the pie. In fact, it only represents about 2% of the online retail market.

THE BRIEF: 

On November 2, 2021, the U.S. House Committee on Financial Services held a hearing entitled “Buy Now, Pay More Later … Investigating Risks and Benefits of BNPL and Other Emerging Fintech Cash Flow Products” to learn more about BNPL, EWA and overdraft avoidance services. Five expert witnesses were called to testify in order for this government task force on financial technology to better understand the sector in advance of potential future regulation. Ultimately, the goal was to educate lawmakers to aid in their inquiry into whether these products should be treated as loans and subject to the associated lending laws, including H.R. 4277, the Truth in Lending Act.

PRO: 

Representing the pro-BNPL side of things were Dr. Kristen Broady, Fellow in the Brookings Metropolitan Policy Program and Penny Lee, CEO of the Financial Technology Association. Broady used a racial equity lens to demonstrate how fintech and BNPL companies provide expanded access to capital and can help mitigate racial wealth gaps. Broady cited data from the Economic Policy Institute that demonstrated that in 2016, only 35% of Hispanic families and 41% of Black families have retirement account savings. In comparison, 68% of white, non-Hispanic families have retirement savings. Fintechs can provide budgeting help and savings opportunities for these groups. 

Lee’s testimony focused on consumer trends: people are saving more and using credit cards less. BNPL sits in contrast to revolving credit and high interest products that can keep consumers in a vicious cycle of debt and take years to pay off. For example, credit cards can sometimes cost consumers up to 225% of product purchase value in interest. 

CON: 

In contrast, Lauren Saunders, Associate Director of the National Consumer Law Center called BNPL just credit “clothed in shiny fintech garb.” She accused BNPL companies of being specifically designed to evade consumer protection laws (even though they are subject to anti-money laundering, fair lending, credit reporting, debt collection, privacy, and fair treatment of customers regulations). Further, Saunders said BNPL companies have abusive profit models that may be built on late fees. 

Later, Lee clarified that BNPL providers actually have a vested interest in their customers meeting their payments. Typically, when someone does miss a payment, their account is immediately paused until they satisfy the initial obligation. This essentially ensures that the products are designed to have accountable payment methods integrated within them. Moreover, less than 15% of BNPL companies in the FTA have a revenue model attached to a late fee, meaning they do not primarily reward late fees or incurring debt. 

In California, BNPL companies have been licensed as lenders and subject to more stringent regulation. Marisabel Torres, Director of California Policy at the Center for Responsible Lending took a middling approach. Of the loans the California Department of Financial Protection and Innovation has published data on, the top 6 BNPL lenders accounted for 91% of total consumer loans originated in 2020. Thus, Torres cautioned lawmakers to examine all the new players in the space, since if there are problems, they will be felt on a large scale. 

FEEDBACK:

Warren Davidson, (Congressman, R-Ohio) talked about the strong market demand for these products and advised his colleagues to exercise caution before taking regulatory action. “We should avoid punishing new products for not fitting into [existing] regulatory buckets, we should clarify how they should fit into regulation,” and “we should facilitate innovation,” he said.

Other government representatives were less sympathetic to BNPL. But most simply wanted clarity about whether there should be a minimum age requirement, and if companies should be required to report repayment history to credit rating agencies. Currently, credit bureaus in the U.S. are figuring out how to model these data sets, and trade organizations like the FTA are actively working with them to ensure they capture positive repayment.

One can anticipate similar themes being addressed in Canadian government channels in the future. Keeping up to speed with developments from our neighbors to the south could be a bellwether of things to come. The Canadian Lenders Association (CLA) will continue to play an active role in any upcoming legislative discussions in order to best advocate for their interests and educate policymakers on the virtues of BNPL.