InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
New York Fed Bank analyzes BNPL usage
On February 14, the Federal Reserve Bank of New York (NY Fed) published a blog post evaluating different households’ use of buy now pay later (BNPL) products, which it generally described as “loans that are payable in four or fewer installments and carry no finance charges.” To understand BNPL usage and its relationship with consumers’ financial situations, the NY Fed conducted a study which revealed distinct usage patterns between the financially fragile and the financially stable.
The study revealed that financially fragile individuals, or individuals who have a credit score below 620, who have been declined for a credit application in the past year, or who have fallen 30 or more days delinquent on a loan in the past year, typically use BNPL to make frequent small purchases when compared to financial stable individuals. The study also found that using BNPL often leads to repeat transactions, indicating a potential trend towards repeat use of the product, particularly among those facing credit challenges.
The study also found that consumers’ motivations for using BNPL differ. Financially stable individuals often cite zero interest as a key advantage, while the financially fragile prioritize ease of access and convenience. The NY Fed summarized that BNPL usage among financially fragile individuals resembles using a credit card for medium-size, out-of-budget purchases, while financially stable users tend to make fewer purchases with a focus of avoiding interest on high-priced items. The NY Fed noted, however, that there is evidence of misunderstanding among users, such as the belief that BNPL helps build credit, concluding that “those with this view may be better off using a credit card.”
New York Governor highlights NYDFS in 2024 State of the State proposal
On January 2, New York Governor Kathy Hochul revealed a proposed plan focused on consumer protection and affordability as the initial part of the Governor’s 2024 State of the State address. The plan includes changes to New York’s consumer protection laws, regulations for buy now pay later products, increased paid medical and disability leave benefits, measures to eliminate co-pays for insulin in specific insurance plans, and legislation addressing medical debt.
Changes to consumer protection laws would give the Attorney General more power to enforce the laws and help the state to address unfair and abusive business practices. Additionally, proposed legislation would require buy now pay later providers to obtain licenses and introduce regulations focusing on disclosure, dispute resolution, credit standards, fee limits, data privacy, and preventing excessive debt.
NYDFS also detailed Governor Hochul’s plan to update and broaden New York’s hospital financial assistance law to provide increased protection against medical debt. The proposed legislation aims to limit hospitals’ ability to sue low-income patients (earning less than 400 percent of the Federal Poverty Level) for medical debt and expand financial assistance programs. It also seeks to cap monthly payments and interest rates on medical debt while enhancing access to financial aid. This consumer protection and affordability plan builds on Governor Hochul and her administration’s efforts to make New York more affordable and livable.
OCC issues guidance on BNPL loans
On December 6, the OCC posted Bulletin 2023-37 to provide banks with guidance on Buy Now, Pay Later (BNPL) loans. The OCC defined BNPL as point-of-sale or “pay-in-4” installment loan products. The OCC noted that, if BNPL products are used responsibly, they “can provide consumers with a low-cost, short-term, small-dollar financing alternative to manage cash flow.”
The OCC emphasized that the banks should offer BNPL loans in accordance with standards for safety and soundness, treat customers fairly, provide fair access to financial services, and act in compliance with applicable laws and regulations. In the bulletin, the OCC highlighted the risks to banks associated with offering BNPL lending, including credit, compliance, operational, strategic, and reputational risks to banks. In particular, the bulletin also underscores the risks that borrowers may not fully understand their BNPL repayment obligations, the challenges of underwriting BNPL applicants who have limited or no credit history, the lack of standardized disclosure language, and the risks of merchant disputes, among other risks.
The OCC recommended banks consider risk management practices, such as maintaining “underwriting, repayment terms, pricing, and safeguards that minimize adverse customer outcomes” tailored to the unique characteristics and risks of BNPL loans. The bulletin also advised banks to pay close attention to “the delivery method, timing, and appropriateness of marketing, advertising, and consumer disclosures,” in particular to ensure that all such documents clearly disclose the borrower’s obligations and any fees that may apply.
2nd Circuit: Reverse and remand a buy-now-pay-later suit
On November 3, the U.S. Court of Appeals for the Second Circuit reversed and remanded a district court’s decision to deny a buy now pay later servicer’s (defendant) motion to compel arbitration in a class action. The plaintiffs alleged the defendant violated the Connecticut Unfair Trade Practices Act, among other things, after the defendant’s charges incurred overdraft fees on the plaintiff’s checking account. The defendant argued that the consumer agreed, on multiple occasions, to the mandatory arbitration provisions in the servicer’s terms and conditions when she used its services. The district court concluded that the plaintiff did not have “reasonably conspicuous notice of and unambiguously manifest assent to [defendant’s] terms” and therefore plaintiff was not bound by the mandatory arbitration provisions in the defendant’s terms.
The 2nd Circuit panel of three judges identified “several factors” in its finding that the plaintiff had reasonably conspicuous notice, including that defendant’s interface was “uncluttered” adding that “[a] reasonable internet user, therefore, could not avoid noticing the hyperlink to [defendant’s] terms when the user selects ‘confirm and continue’ on the [application].” Further, the court found that the plaintiff “unambiguously manifested her assent” to the defendant’s terms and conditions.
CFPB, EU start talks on AI, digital finance
On July 17, CFPB Director Rohit Chopra and Commissioner for Justice and Consumer Protection of the European Commission Didier Reynders issued a joint statement announcing the start of new dialogue on consumer financial protection with a primary focus on digital developments in the financial sector and ways to improve policy and regulatory cooperation.
Chopra and Reynders stressed that there are significant implications for both businesses and households from the digitalization of the financial services sector, including impacts on pricing, customer service, competition, and privacy. They noted that financial institutions are increasingly deploying automated decision-making processes, leveraging artificial intelligence technologies, and developing and introducing new financial products and services, such as Buy Now, Pay Later. Chopra and Reynders also commented that digital payments are becoming “increasingly offered and controlled by Big Tech.” They warned these developments, if not properly regulated, “could increase consumers’ exposure to fraud and manipulation, limit their product options over time, threaten their control over their own data, and force them to accept more expensive personalized pricing for the same products and services compared to other consumers.” Chopra and Reynders also cautioned that policymakers must do more to keep pace with evolving markets and ensure consumer protection.
The dialogue will address topics relating to:
- The deployment of automated decision-making and data processing and implications for consumers;
- Risks associated with emerging credit options, including the potential risks of over-consumption and over-indebtedness for consumers who use these products;
- Measures for exploring ways to assist over-indebted consumers in managing and repaying their debt sustainably;
- Digital transformation and access to fair financial services, including to unbanked and underbanked consumers, as well as those who prioritize protecting their personal data; and
- Competition, privacy, security, and financial stability implications associated with big tech companies that offer financial services.
Chopra and Reynders will meet informally at least once per year to share insights and experiences on consumer financial issues. According to the statement, the dialogue will also involve staff discussions, bilateral meetings with subject matter experts, and roundtables with stakeholders. The cooperation and exchanges within the informal dialogue are expected “to occur in parallel with other forms of cooperation and exchanges between the European Union and the United States on various digital and financial services policies and regulations,” the joint statement said.
CFPB publishes BNPL borrower profiles
On March 2, the CFPB released a report examining the financial profiles of Buy Now, Pay Later (BNPL) borrowers using data pulled from the agency’s Making Ends Meet survey and its access to credit bureau data. The report follows previous Bureau research conducted on the BNPL market (covered by InfoBytes here). The Bureau observed that, while many BNPL borrowers used the product without any noticeable markers of financial stress, these borrowers (as compared to non-BNPL borrowers) were, on average, more likely to have higher credit card debt and utilization rates and were more likely to have revolving balances on their credit cards. BNPL borrowers also had lower credit scores and higher utilization rates of alternative financial services such as payday loans and pawn loans that charge high interest rates and were more likely to incur bank account overdrafts. The report noted, however, that while BNPL borrowers generally have access to traditional credit products, they are more likely to borrow using retail accounts, personal loans, student loans, and auto loans compared to non-BNPL borrowers (BNPL borrowers were more than twice as likely to be delinquent on at least one of those products by 30 days or longer). The Bureau commented though “that many of these differences pre-date [BNPL] use and [the report] highlights the need for further research into whether the products have any causal impact on consumer indebtedness.” Black, Hispanic, and female consumers are also more likely than average to use BNPL products, the report found, along with consumers with income between $20,001-$50,000.
Chopra says CFPB is examining industry standard settings
On November 2, CFPB Director Rohit Chopra delivered prepared remarks before a public meeting of the Bureau’s Consumer Advisory Board briefly touching upon on several topics related to the Buy Now Pay Later market, big tech and data collection, peer-to-peer payment platforms, and Section 1033 rulemaking concerning consumers’ rights to their personal financial data. Notably, Chopra raised an area of discussion concerning industry standard-setting organizations and providers of critical infrastructure. Recognizing that private organizations play a major role in setting standards across sectors of the economy, Chopra emphasized that “[d]ecentralized, open banking will likely rely on fair standard-setting, through an amalgam of legally binding rules and industry developed standards.” He warned though that it “can be difficult to achieve fair standard-setting, since incumbents will have a strong economic interest when it comes to protecting their turf.” Chopra pointed to the telecommunications and health care industries as areas where private organizations “are not neutral, but are instead owned or governed by certain market participants” and where other players may also integrate a function akin to a lobbying or trade association. Explaining that the Bureau has been devoting a lot of time to this space, Chopra said the agency is gathering insights into other countries’ experiences, such as the UK’s Open Banking Implementation Entity (which was established to provide critical services and infrastructure), as well as domestic developments. He stated the Bureau will develop rulemaking with a practical mindset of how requirements would be operationalized in the market.
CFPB studying BNPL growth
On September 15, the CFPB announced plans to consider issuing interpretive guidance or regulations to ensure that buy now, pay later (BNPL) lenders follow many of the same consumer protection measures that exist for credit cards. “We will be working to ensure that borrowers have similar protections, regardless of whether they use a credit card or a Buy Now, Pay Later loan,” CFPB Director Rohit Chopra said in the announcement. The Bureau described BNPL products as a form of interest-free credit that “serves as a close substitute for credit cards” and allows consumers to split a retail transaction into smaller, interest-free installments that are repaid over time.
Recognizing that BNPL products are a rapidly growing alternative form of credit for online retail purchases, the Bureau published a report providing key insights into the industry. According to the report, the number of BNPL loans originated from 2019 to 2021 in the US grew 970 percent, from 16.8 million to 180 million. The total dollar volume of these loans grew by 1,092 percent in that period, from $2 billion in 2019 to $24.2 billion in 2021, the report said, noting that 73 percent of applicants were approved for credit in 2021, up from 69 percent in 2020. Additionally, the report found that 89 percent of consumers using BNPL loans linked their accounts to their debit cards, and that late fee policies vary by issuer.
The Bureau raised several concerns with BNPL products in the report, including (i) inconsistent standardized cost-of-credit disclosures, minimal dispute resolution rights, a forced opt-in to autopay, and occurrences where consumers are assessed multiple late fees on the same missed payment; (ii) risks related to data harvesting and monetization, as many BNPL lenders shift business models toward proprietary app usage, allowing lenders “to build a valuable digital profile of each user’s shopping preferences and behavior”; and (iii) concerns over consumers taking out several loans during a short period of time at multiple lenders. According to the Bureau, because most BNPL lenders currently do not furnish data to the major credit reporting companies, many lenders are unaware of a consumer’s current liabilities when deciding whether to originate new loans.
The Bureau noted in its announcement that while BNPL lenders are currently subject to some federal and state oversight, compliance and licensing requirements vary. In addition to exploring potential new regulatory guidance, the Bureau said it plans to identify surveillance practices that BNPL lenders should seek to avoid, and it will continue to address the development of appropriate and accurate credit reporting practices for the industry. Chopra further announced that the Bureau is inviting BNPL lenders to self-identify if they wish to be examined for any potentially problematic business practices. The Bureau is also reviewing its authorities to conduct examinations on a compulsory basis and will work with state regulators that license nonbank finance companies on examinations of BNPL firms.
DFPI enters into settlement with unlicensed point-of-sale lender
On August 3, the California Department of Financial Protection and Innovation (DFPI) announced a settlement with a Florida-based point-of-sale lender for allegedly engaging in the business of finance lending in California without obtaining a license. According to the settlement, after conducting an inquiry, DFPI determined that the company violated California Financial Code section 22100(a) “by making loans through the operation of buy now, pay later’ point-of-sale products” without obtaining a proper license. The company voluntarily agreed to the consent order, and, among other things: (i) agreed to desist and refrain from engaging in the business of a finance lender or broker in California unless/until it obtains a California Financing Law (CFL) license authorizing the company to conduct business as a finance lender or broker; (ii) must pay an administrative penalty of $2,500; and (iii) refund fees totaling $13,065. The company also agreed that it will only make loans, deferred payment products, and extensions of credit to California residents under the authority of a CFL license and in compliance with the statute.
CFPB highlights risks associated with BNPL products
On August 4, the CFPB released a report highlighting risks associated with new product offerings that the agency claimed blur the line between payments and commerce. The report examined the development of new capabilities—like “super apps,” buy now, pay later (BNPL), and embedded commerce—that have the potential to streamline payments, facilitate commerce, and enhance user experience, but may also create opportunities for companies to aggregate and monetize consumer financial data. With respect to “super apps,” the Bureau warned that these services have “morphed” into a “bank in an app” model, providing a “wide array of financial, payment and commerce functions within a single app.” These financial services super apps may seem to be more convenient than having multiple relationships with different organizations, the Bureau said, but cautioned that using these products may limit consumer product and service choice. “While consumers can opt to use a payment offering outside an app, such super apps create the potential for providers to steer consumers to specific solutions and/or limit access to some products.”
The report also raised concerns about tech firms offering their own lending or BNPL products. The Bureau pointed out that BNPL options, which provide unsecured short-term credit allowing consumers to split purchases into four equal interest-free payments at the point of sale, have “soared in recent years” as a popular alternative to credit cards. The Bureau noted it is “carefully focused on the shift toward real-time payments in the United States,” and is “seeking to mitigate the potential consequences of large technology firms moving into this space.”
The Bureau further stressed it is “carefully monitoring the payments ecosystem as part of a multifaceted effort to promote fair, transparent, and competitive markets for consumer financial services,” and said it is currently working on Dodd-Frank Act rules that would give consumers more control over the personal financial data that they choose to share with finance and payment apps. The Bureau also stated that it is “assessing new models of lending integrated with payments and ecommerce, such as BNPL,” and plans to issue a report on its findings and make a determination as to whether any regulatory interventions are appropriate. Last year, the Bureau issued a series of orders to five companies seeking information regarding the risks and benefits of the BNPL credit model (covered by InfoBytes here).