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Consumers turn to ‘buy now, pay later,’ stoking worry about repayment ability

Goldman Sachs, Mastercard enter the market

Penny Lee, CEO of the Financial Technology Association, says buy now, pay later helps small and medium merchants  compete against large online marketplaces.
Penny Lee, CEO of the Financial Technology Association, says buy now, pay later helps small and medium merchants compete against large online marketplaces. (Tom Williams/CQ Roll Call)

Well-established companies such as The Goldman Sachs Group Inc. and Mastercard Inc. are diving headlong into a financial technology product that some critics fear poses risks to consumers.

The service, known as “buy now, pay later,” or BNPL for short, is a twist on the old-fashioned layaway plans once offered by retailers. The difference is that consumers get their goods right away, and many of the plans may come from their financial companies, not the sellers.

Mastercard said last month that it’s launching a service that will provide customers with a flexible way to pay online or in store through interest-free installments. The “Mastercard Installments” BNPL program will be offered in the U.S., U.K. and Australia.

PayPal Holdings Inc. acquired Japanese startup Paidy Inc. last month for $2.7 billion to deepen its BNPL offerings. Goldman Sachs and Apple are partnering to launch a BNPL service called Apple Pay Later.

The payment model has grown in popularity in the United States since the onset of the COVID-19 pandemic, allowing consumers to divide their purchases into several smaller — usually four — interest-free payments, which are made biweekly or monthly until the balance is paid in full. Most charge late fees for missing payments.

Experts say the rapid expansion is sure to draw the attention of regulators.

“The BNPL space is growing fast. When it comes to credit, consumers gravitate to options that make their choices easy and the processes simple, and BNPL does both,” said Jo Ann Barefoot, a former deputy comptroller of the currency and Senate Banking Committee staff member who now leads the Alliance for Innovative Regulation in Washington. “Those very traits, however, raise concerns among advocates and regulators, so regulatory focus is growing commensurately with the growth of these products.”

Some of the regulatory reaction so far includes the Consumer Financial Protection Bureau in June advising consumers of the benefits and pitfalls, and the U.K.’s Financial Conduct Authority’s announcement that it will oversee the BNPL industry.

Ted Rossman, a financial analyst at and, said BNPL is popular because the fixed installments “provide a light at the end of the tunnel” that both feels better to consumers and can save them money compared with a credit card purchase — especially if they’re only making minimum payments on the latter at an average 16 percent interest rate.

Another benefit, according to the CFPB, is that approval for a BNPL service, which can be done during an online checkout or through a mobile app, will take only a few minutes and generally doesn’t involve a “hard credit inquiry.”  

Hard inquiries are typically made by lenders after a consumer applies for credit and impact a person’s credit score because they may indicate the consumer is applying for more credit.

Most BNPL providers require identity-validated applicants only to declare they are at least 18 years old, have a mobile phone number and possess a debit or credit card to make payments.

Retailers are also increasingly embracing the model, said Penny Lee, CEO of the Financial Technology Association, a Washington-based financial technology industry group. She said they may see the option as a pathway to a growth in sales, more repeat purchases, higher customer conversion rates, increased brand engagement and greater customer satisfaction.

“BNPL provides small and medium merchants a platform to compete against large online marketplaces and build a direct relationship with the consumer,” she said.

CNBC, citing data from FIS Worldpay, has put the BNPL market at $60 billion globally in 2019, or 2.6 percent of e-commerce, excluding China. BNPL accounts for less than 2 percent of North American sales. FIS Worldpay estimated that the payment option could grow to $166 billion by 2023, according to CNBC.

‘Debt is debt’

Experts warn consumers there may be downsides.

“Debt is debt, and BNPL is debt that is very easy to incur and easy to forget when managing your personal finances,” said Todd H. Baker, a professor at the Columbia University law and business schools in New York. “It adds significant complexity to the stressed financial lives of already over-levered consumers with debt obligations for mortgages, credit cards, auto loans and personal installment loans.”

“Late fees are another potential peril,” Rossman said, pointing to research showing 43 percent of users of such services have paid late at least once over the past two years. Small amounts such as $10 may not feel like a lot, “but they can add up at scale,” he said.

He said missing installment payments can also hurt a consumer’s credit score — sometimes even after only 30 days.

Barefoot cautioned that relationships between BNPL lenders and retailers can lead to the consumer being offered an easy loan that actually compares unfavorably with other options, which people could find if they took the time to search, “but typically don’t.”  

“There is concern that the borrower’s decision is fast, with no ‘pause for thought,’” she said. “At the point of sale, the desire for instant gratification can dominate the decision-making process, because the consumer really, really wants the thing they’re buying.”

Sezzle Inc., a self-described fintech company “with a purpose” that offers small installment loans for online purchases, last year settled an enforcement action with the California Department of Business Oversight. State regulators concluded that Sezzle was making illegal loans under California law. They demanded that the company refund $282,000 to consumers and pay a nearly $30,000 penalty.

A.J. Dhaliwal, special counsel at the law firm Sheppard, Mullin, Richter & Hampton LLP, said whether BNPL products could be considered lending wasn’t really a question until the California regulators deemed they were “loans,” even though the common understanding of the relevant statutes and case law likely wouldn’t have yielded the same legal conclusion.  

Because of California’s influence in financial supervision among the states, “there’s a fear that other regulators will reach a similar conclusion, which could result in a decrease in the popularity in using BNPL,” Dhaliwal said.

He said there are growing concerns among regulators that the service “represents a significant potential harm” in terms of a perceived lack of consumer understanding of the risks, “which could lead to overindebtedness, and all of which are exacerbated by the speed and convenience of these platforms and consumer demand.”

Moving forward, industry observers expect to see greater regulation. Barefoot, Baker and Rossman see the CFPB as likely taking the lead at the federal level.

But Dhaliwal said he expects firms to continue to be regulated by “a myriad of federal and state regulators looking to apply their specific consumer credit laws.”

Baker said providers “would prefer to be ignored,” based on the idea that they’re not really lending at all, but that’s an “unlikely outcome, given the size of the BNPL industry and the significant late fee and collection activity associated with the product.”

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