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Online payment plan exponentially expanding, but experts and officials eye more regulation and urge consumer caution

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InvestigateTV – Spend any time shopping online and you will likely come across a fast-growing form of payment – Buy Now, Pay Later, or BNPL. The lending option is seen by industry experts as an alternative to traditional credit cards.

Rather than putting the entire cost of goods or services on a credit card, when consumers check out online or in-app, BNPL offers the ability to spread the cost of their purchase over several interest-free payments (usually four) that are due every few weeks (usually two) through autopay tied to a separate payment account.

As online shopping exploded during the pandemic, BNPL followed suit. According to a 2022 Consumer Financial Protection Bureau (CFPB) Report, five major Buy Now, Pay Later Firms – AfterPay, Klarna, Paypal, Affirm, and Zip – reported that from 2019 to 2021, BNPL loans grew from $2 billion to $24 billion.

Juniper Research, a UK-based market research firm, expects the number of global BNPL users to expand from 360 million in 2022 to more than 900 million in 2027. Major retailers like Amazon, Walmart, Target, and even Kroger now offer the BNPL option .

But as the payment plan grows in popularity, federal watchdog groups and state lawmakers are highlighting concerns. Laura Udis is the senior manager for Small Dollar and Installment Lending at the CFPB’s Research, Marketing, and Regulation Division. One of the authors of this year’s report, Udis said consumers who overuse BNPL may find themselves financially in over their heads.

Laura Udis works at the Consumer Financial Protection Bureau in DC She continues to study the rapid growth rate for Buy Now, Pay Later.(InvestigateTV)

“Buy Now, Pay Later being so quick and easy and relatively simple may encourage overspending and overextension where consumers quickly buy a number of products from Buy Now, Pay Later firms and lose track of when payments are due,” Udis said.

“Even better than a credit card”

Cary Williamson has used BNPL services for years. The mother of two young boys said she finds herself constantly shopping to replace their clothes and shoes. Williamson said BNPL is a “life saver” and helps with those costs, along with offering the option to split payments for larger purchases.

“I think it makes life easier when you’re a one-income household like we are,” she said. “You can’t buy a whole entire wardrobe for your children at once. It’s just not affordable.”

Williamson said she’s paid for purchases with Afterpay, Sezzle and Klarna, three of the dozens of BNPL companies now on the market.

“I’ve never had a problem,” she said. “I mean, they send me a reminder, the money is always there, and they send you your product immediately.”

Cary Williamson and her family use Buy Now, Pay later because they say it helps keep up with...
Cary Williamson and her family use Buy Now, Pay later because they say it helps keep up with high prices and replaces the shoes and clothes of her two boys. The family hopes to use BNPL in the future for family trips.(Cary Williamson)

Williamson said she turned to BNPL because she and her husband do not use credit cards and instead take advantage of BNPL’s often interest-free payments to avoid credit card interest rates.

“(BNPL is) even better than a credit card,” Williamson said. “Sometimes you don’t always have $400 or $500, but you do have the $100, the $200 right away. And then if you get paid back every two weeks, it just works itself out.”

But while Buy Now, Pay Later loans work for Williamson, officials across the US are calling for stricter regulation of the industry.

Federal watchdog raises concerns

The Consumer Financial Protection Bureau (CFPB) is taking a closer look at BNPL following a September study that addressed the benefits as compared to traditional credit options but also identified potential risks for consumers.

As part of the study, the CFPB asked for public comments on company and consumer experiences while using Buy Now, Pay Later.

One consumer shared her experience while using AfterPay and said it was positive, but she “did spend more money than usual because it was so easy.”

The Consumer Financial Protection Bureau asked for public comments from the public to learn...
The Consumer Financial Protection Bureau asked for public comments from the public to learn more about their experiences using BNPL. (InvestigateTV)

The American Financial Services Association said in a public comment that it recommends the BNPL market can improve by “supporting the credit bureaus as they develop a framework to allow BNPL credit reporting”, and “requiring BNPL provides to disclose all relevant product information that is truthful and transparent.”

The agency’s report identified three major concerns with BNPL:

  • Inconsistent consumer protections
  • Data harvesting and monetization
  • Debt accumulation and overextension

“Most of Buy Now, Pay Later firms because of the loan structure (four payment, no interest loan) – are not providing the same standardized credit disclosures that a consumer would get with other loan products,” Udis said.

As part of the report the CFPB outlined its plan to address the potential negative impacts on consumers:

“To address the discrete consumer harms, the CFPB will identify potential interpretive guidance or rules to issue with the goal of ensuring that Buy Now, Pay Later lenders adhere to many of the baseline protections that Congress has already established for credit cards. As part of this review, the agency will also ensure Buy Now, Pay Later lenders, just like credit card companies, are subjected to appropriate supervisory examinations.” – CFPB

Although BNPL only represents 4% of e-commerce in the US, Udis tells InvestigateTV those numbers are doubling year over year. She said along with the increased usage is an uptick in late fees and returns.

  • 10.5% of unique users were charged at least one late fee in 2021, up from 7.8% in 2020.
  • 13.7% of individual loans in 2021 had at least some portion of the order that was returned, up from 12.2% in 2020
These are the four steps most consumers follow while using BNPL services.  The CFPB's research shows...
These are the four steps most consumers follow while using BNPL services. CFPB’s research shows the process is easy for consumers but warns of potential issues when using BNPL services.(Consumer Financial Protection Bureau September Report)

While she would not give an exact timeline, Udis said the CFPB and the Federal Trade Commission are expected to release new rules and guidelines for Buy Now, Pay Later companies.

The federal government is not the only authority calling for more BNPL regulation. Earlier this year, 21 state attorneys general responded to CFPB public comments calling for a push against “predatory lending” and a need for more industry transparency.

In their statement, the attorneys general said there are concerns about BNPL products becoming “popular among younger consumers unfamiliar with navigating credit products and consumers.”

Karen Straughn is Maryland’s mediation unit director at the Consumer Protection Division in the Maryland Attorney General’s office, one of the 21 attorneys general to respond.

“We want to make sure people are aware of what they’re doing before they do it because this can really seriously impact your credit rating as well,” Straughn said.

Karen Straughn with Maryland General's office speaks with Consumer Investigator Rachel DePompa...
Karen Straughn with Maryland General’s office speaks with Consumer Investigator Rachel DePompa on why consumers should take Buy Now, Pay later seriously. She suggested if consumers have concerns with BNPL services, they should file a complaint with the local state Attorney General.(InvestigateTV)

She said research shows that consumers tend to buy more when they have BNPL options. She also urged shoppers to learn the differences between credit cards and Buy Now, Pay Later and stressed payments made on BNPL purchases do nothing to build your credit score.

“Credit cards you are building credit when you make purchases and you pay off your bill, whether you pay the minimum amount or you pay the full bill,” Straughn said. “With a Buy Now, Pay Later situation, you’re not building credit, the only thing you may do is potentially harm your credit if you miss a payment.”

California’s Office of the Attorney General responded with the following statement regarding BNPL products:

“Novel financial products promise to democratize the financial industry, but unfortunately their shiny packaging often conceals many of the same hallmarks of the predatory loans that have long driven consumers into a never-ending cycle of debt. We urgently need to regulate the ‘Buy-Now[1]Pay-Later’ industry before more vulnerable consumers suffer from their reckless misconduct. – CA Attorney General Rob Bonta

InvestigateTV reached out to the five major companies for a response. An Affirm spokesperson told InvestigateTV in a statement that their company is transparent and there are no hidden fees.

Klarna spokesperson said, “Low-cost, low-risk, no-interest products like BNPL should not fundamentally be regulated in the same fashion as high-cost credit products.”

Afterpay said in a statement it pauses accounts from future purchases if a payment is late.” PayPal spoke with InvestigateTV over the phone but did not provide a statement. A Zip spokesperson said the company “provides fair, flexible, and transparent payment options to consumers.”

Experts: Budgeting is key

Financial experts InvestigateTV spoke with said the Buy Now, Pay Later option can be helpful to consumers, but tracking your purchases is critical to preventing financial overextension.

Cherry Dale, a financial coach with the Virginia Credit Union, said budgeting is key.

“You as the consumer need to understand ‘Okay, I have a Buy Now, Pay Later product that I’m paying $100 or $200 on.’ I got to calculate that and make sure that I don’t get in over my head,” Dale said.

She said shoppers who sign up for BNPL should have a budget and set money aside to pay off any loan. Dale suggested getting familiar with the lending company you use:

  • Make sure you understand the terms of your contract and read the fine print before agreeing to them
  • Track the money that is being pulled from your account
  • Know the consequences of missing a payment (some lenders might charge you a late fee)
  • Remember that your payments won’t show up on your credit report

Cary Williamson said Buy Now, Pay Later is a useful tool for her family that helps make inflation more manageable.

“I love it,” she said. “It just makes it a little more helpful with the cost of everything going on right now.”

Buy Now, Pay Later – a payment plan that works for Williamson but for others, experts warn it could lead you into a budgetary bind.

To read full statements from the five major lenders and comments from California’s Attorney General:

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