Capitol Hill: BNPL has advantages, growing risks

Buy Now, Pay Later (BNPL) plans and other financial innovations, such as Access to Earned Wage (EWA), have the potential to expand financial access for underserved populations, but also have risks that consumers can surpass themselves, a panel of academics and non-officials. profit executives said Tuesday (Nov. 2).

The audience before the House subcommittee on financial services was titled “Buy now, pay later?” Investigate the Risks and Rewards of BNPL and Other Emerging Fintech Cash Flow Products.

Dr Kristen E. Broady, a fellow of the Brookings Institution’s Metropolitan Policy Program, said in his testimony that FinTechs can help close the racial wealth gap that exists in the United States. As she noted, these same companies can “create inclusive financial services products for people with invisible credit or people with low credit.”

Broady noted that offering accounts with no overdraft fees or minimum balance requirements can help reduce the impact of otherwise volatile income and expenses. She pointed to BNPL’s options that provide interest-free buy now, pay later capabilities so consumers can “comfortably shop and spread payments as they get paid.”

In one example, Broady said, Klarna’s BNPL option allows customers to split the cost of their purchase into four smaller payments, without paying interest or affecting their credit score.

Elsewhere, Lauren Saunders, associate director at the National Consumer Law Center, said in her own testimony that “Some new types of finance products seize the opportunities created by gaps or failures in the current market. If they are well designed, they can have a place to meet the needs of consumers.

However, “other FinTech liquidity products primarily appear to be designed to evade consumer protection laws,” Saunders added. During her testimony, Saunders said she was “concerned about credit products that claim not to be covered by federal or state credit laws.”

“Even credit products that can help consumers manage their finances should be covered by basic consumer protections, including interest rate limits, underwriting for repayment capacity, cost transparency, litigation rights and fair loan laws, ”Saunders continued.

She asserted that with some BNPL options, consumers may be “getting into debt on debts they cannot afford to repay, and dealing with frequent irregular BNPL payments can be difficult”. With a nod to EWA products, she said they should be regulated as credit.

“Instead of encouraging employees to spend next week’s salary today, employers should focus on low-value, affordable savings programs” and installment loans, Saunders said. BNPL, she warned, should not be viewed as a way to create or provide credit to underserved populations – in part because payments are not reported to credit bureaus, but payments missed are.

Marisabel Torres, director of the California Policy Center for Responsible Lending, said BNPL loans are designed to avoid coverage by the Truth in Lending Act, where creditors by definition do not include finance charges and are payable. in four or less installments.

Among other recommendations, she said the Consumer Financial Protection Bureau (CFPB) should ensure that BNPL lenders only grant loans after determining the borrower’s repayment capacity, taking into account both income and expenses or obligations. As the use of BNPL increases, she said, so do the risks “on a large scale and increasingly.”

Asked by Rep. Stephen Lynch, D-Mass, about BNPL defaults, Saunders cited data from Credit Karma which found that 34% of consumers who tried BNPL loans fell behind on one or more payments. staggered.

Brian Tate, President and CEO of the Innovative Payments Association (IPA), said that among recent payments innovations, “one of the most convenient and affordable options is access to pay. won, or EWA “. This option, he said, has gained popularity because it is a “safer, cheaper and more effective alternative to other short-term products on the market.”

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