Senate Banking Democrats see the specter of the 2008 financial crisis in emerging technology-based lending products that lack the consumer protections applied to traditional forms of credit, including buy now, pay later services.
Sen. Mark Warner, D-Va., warned that unregulated financial products have migrated from the commercial to the retail sector since the last crisis. The lead-up to 2008 was characterized by the proliferation of asset-backed securities and collateralized debt obligations, but now it's the rise of consumer-focused fintech services, including buy now, pay later and advanced paycheck products, he said at a Senate Banking hearing Tuesday.
“We've seen now a migration in the nonregulated part of the financial industry. A massive amount of new consumer products [have] come up in this area,” Warner said. “Some of these things bring real benefits, but I think we focus sometimes almost exclusively on the benefits and not on some of the challenges. The truth is I think there are reasons that we have regulated financial institutions and with that regulation while there are burdens, there are also some benefits.”
Buy now, pay later products rose in popularity during the pandemic as lockdowns drove consumers online. Spending through the products grew 230 percent from January 2020 to September 2021, according to a study commissioned by buy now, pay later provider Afterpay.
The service allows consumers to pay for a product, often bought online, in a set number of installment payments and a predetermined period of time, usually four payments over six to eight weeks. Consumers accrue fees and can be cut off from using the service if they fall behind schedule. The providers make money from merchants, who pay a fee to offer the services to customers.
Ranking Republican Patrick J. Toomey, R-Pa., said regulating the products too quickly or stringently would stifle innovation and hurt consumers. He applauded the products for providing credit to people often left behind by traditional lenders, including low-income and young people.
“This is a reminder that market competition is typically better at helping consumers than the government — whether the product or service is in the financial sector or another category,” Toomey said. “As long as consumers have truthful and accurate information about financial products, they’re best positioned to decide what products to use."
The Consumer Financial Protection Bureau last year opened a request for information on the products. The agency highlighted questions about whether consumers are accumulating an unsustainable amount of debt, and whether companies are skirting regulations or engaging in unfair data collection.
The structure of the services has so far allowed many products to avoid requirements that apply to traditional lending products, including credit cards, though consumer advocates told senators the usual protections should apply.
Rachel Gittleman, financial services outreach manager for the Consumer Federation of America, said laws requiring standard disclosure of borrowing costs, providing additional protections for members of the military, protecting against discrimination in lending and in electronic payments should apply to buy now, pay later products.
“We would argue that most consumer protection laws should apply to buy now, pay later, as it's being structured more and more like open-end credit,” she said. “Federal regulators should supervise buy now, pay later providers and ensure that they're not engaging in unfair, deceptive or abusive acts and practices, or unlawful discrimination.”
Penny Lee, CEO of the Financial Technology Association, told the panel that users know what they’re getting into and like the product.
Only 4 percent of buy now, pay later users missed at least a payment, Lee said, citing a March study by the Financial Health Network. A September poll commissioned by Lee’s association found 94 percent of users said they easily understood the terms and conditions of buy now, pay later services.
“BNPL products are also subject to consumer protection regulations, including anti-money laundering, fair-lending, debt collection, privacy, fair treatment of consumers and electronic fund transfers. They are also subject to similar state consumer protection laws,” Lee said.
Her written testimony, however, said that in some cases the products may not be considered loans if they’re structured as credit sales or retail installment sales through agreements with merchants selling the goods or services.