77 Consumer groups urge authorities to regulate ‘buy now, pay later’ apps

*The advocacy groups warn that several consumers are taking on too much debt with ‘buy now, pay later’ (BNPL) services

Isola Moses | ConsumerConnect

At the time ‘buy now, pay later’ (BNPL) services first appeared in the marketplace, several consumers were said to have applauded them as a solution to mounting high-interest credit card debts.

However, about 77 consumer and community groups are now raising serious concerns about the financial product.

The groups, in a comment letter to the Consumer Financial Protection Bureau (CFPB), requested the agency to provide oversight and regulation of these products.

The letter warns that BNPL is contributing to an explosion in consumer debt.

“BNPL products have largely evaded oversight by federal and state regulators,” the groups stated.

“Although these products could have a place in meeting consumer needs if they operate as promised, they pose a risk to consumers and should be covered by basic consumer protections.”

How BNPL works

The theory behind BNPL is simple. Instead of putting a purchase on a credit card, adding to a high-interest balance, a consumer uses a BNPL app to finance the purchase.

The consumer pays 25% as a down payment and makes three more payments every two weeks until the purchase is paid off.

But the consumer groups claim it isn’t working out that way for many BNPL users.

The groups claim that within the industry, there is a lack of meaningful underwriting to determine if the consumer can afford the purchase.

In the letter to the CFPB, the consumer groups claim that some BNPL services have hidden fees and no clear disclosures. In short, the groups point out that debt is debt, and when consumers take on more than they can handle, they get in trouble.

“Marketing of Buy-Now-Pay-Later credit is enticing, with promises of instant approval and no impact on a consumer’s credit,” said the groups in the letter.

“However, many providers are not conducting meaningful underwriting to assess a borrower’s ability to repay, allowing consumers to accumulate unaffordable amounts of debt.”

Repayments default

A September 2021, survey by Credit Karma found that 44 percent of Americans had used a BNPL plan.

Of those consumers in the study, 34 percent said they have fallen behind on payments.

Agency report indicates those who missed payments have had significant consequences.

Of those who admitted to having missed at least one payment, 72 percent said they believe their credit score declined as a result. Nearly a third said they experienced “significant” declines in their credit score, report stated.

ConsumerAffairs’ research team has reviewed the growing field of BNPL apps and identified a few of the top competitors.

Commonly praised characteristics include a good online reputation, rate transparency, and a generous availability of services.

Some BNPL apps also don’t charge interest and set spending limits for users, based on their credit history. For example, Sezzle does a soft credit pull to determine if you qualify, so applying doesn’t affect your credit score.