Did you utilize the BNPL option during the holiday season? If you did, you were not alone.
BNPL, short for “buy now, pay later,” is an increasingly popular online payment method that has sparked debates regarding its impact on consumers.
According to data from Adobe Analytics, BNPL saw significant usage on Cyber Monday at the start of the holiday season in November, with shoppers making purchases totaling \(940 million using this method—an impressive 42.5% increase from the previous year. (Overall Cyber Monday sales reached \)12.4 billion, as reported by Adobe.)
BNPL functions as a short-term loan that enables shoppers to split their online purchases into four payments spread out over six weeks. While no interest is applied, late fees are incurred for missed payments. Users are not subjected to a rigorous credit check, but they are required to authorize automatic deductions from a specified source, such as a debit or credit card, for repayment.
Major BNPL providers, including well-known names like PayPal, Zip, Klarna, Afterpay, and Affirm, collaborate with merchants to offer this service in exchange for a portion of the purchase amount.
Although BNPL started gaining attention in 2019, its popularity surged during the COVID-19 pandemic, according to the Consumer Financial Protection Bureau (CFPB), a federal agency overseeing consumer finance markets.
In a report from fall 2022, the CFPB highlighted that while BNPL functions similarly to credit cards, it lacks certain consumer protections provided by credit cards, such as dispute resolution mechanisms and transparent disclosure of loan terms.
The agency also expressed concerns about BNPL lenders extracting data from borrowers for marketing purposes, potentially compromising privacy or encouraging excessive borrowing. The ease of borrowing could lead to consumers accumulating multiple loans simultaneously, a phenomenon known as overextension.
Unlike traditional lenders like banks, which are regulated by identifiable state and federal authorities, the regulatory landscape for BNPL is less defined. However, the CFPB indicated that its enforcement jurisdiction over “credit providers” and “non-depository covered entities” could extend to BNPL service providers.
Following a “market monitoring inquiry” directed at several BNPL providers to gather loan data, the agency announced its intention to establish regulations ensuring that BNPL providers adhere to similar consumer protections and regulatory oversight already in place for credit card companies, drawing insights from countries where BNPL is also popular.
Meanwhile, members of the U.S. Senate’s banking committee, including Chairman Sherrod Brown from Ohio, recently called on the agency to maintain a watchful eye on BNPL practices. While some view BNPL loans as a means of broadening access to credit, the senators cautioned against the backdrop of increasing household debt and delinquencies.
The senators emphasized that the agency must prevent BNPL from being exploited as a tool to take advantage of financially vulnerable consumers.