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1 1 (August 8, 2024)

handle is hein.crs/goveqhe0001 and id is 1 raw text is: Informing ~&on IRese'~r hService le i I9tive I ~ba e s:i ce 1914 0 August 8, 2024 Rapidly Growing Buy Now, Pay Later (BNPL) Financing: Market Developments and Policy Issues Buy now, pay later (BNPL) is a form of point-of-sales financing. With BNPL financing, a consumer can purchase an item now and pay for it later on a predetermined payment schedule. While retailers have offered BNPL financing for much of history in the form of installment plans, it is now often offered online. This modern form has generally been developed by technology-focused, nonbank financial companies, also known as financial technology (or fintech) companies. BNPL financing has been growing rapidly in recent years. The Consumer Financial Protection Bureau (CFPB) estimated that the number of BNPL originations (new financing offerings) by five major providers grew nearly tenfold from 2019 to 2021 with 180 million originations in 2021 totaling $24.2 billion (see Figure 1). Research by the CFPB found that 17% of consumers surveyed used BNPL between February 2021 and February 2022. Figure I. BNPL Originations by Quarter: 2019-2021 Source: CFPB. This In Focus discusses the BNPL financing and potential policy issues in this market. The CFPB released an interpretive rule in May 2024-in effect as of July 30, 2024-that treats BNPL as equivalent in some ways to a credit card and mandates Truth in Lending Act (TILA; 15 U.S.C. §§1601 et seq.) disclosures and the right to dispute charges. Legislation introduced in the 118th Congress would overturn the rule using the Congressional Review Act (H.J.Res. 190 and H.J.Res. 195) or mandate further study before rule finalization (H.R. 8628). The BNPL Finandng Market BNPL financing allows consumers to pay for purchases in payments over time, generally without accruing interest. For example, BNPL financing services typically offer Pay in 4 programs, which require four installment payments in four two-week intervals. BNPL companies can also offer financing over various terms. These other options, particularly for more expensive products, require monthly payments. Monthly options, which can last up to 60 months depending on the provider, may also charge interest. These monthly options are generally already covered by TILA, as they typically require more than four installments and are more facially similar to a consumer loan. BNPL financing may help consumers with their personal cash flow. Compared to other traditional financial products (e.g., credit cards), BNPL financing is often lower cost and arguably more flexible. BNPL financing may be attractive to younger consumers and those with thinner credit files who may not qualify for traditional credit cards. A consumer may use BNPL financing through a merchant that embeds it as a payment option in the checkout process or directly on BNPL companies' platforms. BNPL companies determine consumer terms through soft credit checks and consumers' past performances on those platforms. While BNPL companies generally do not charge interest or fees at time of purchase for their Pay in 4 products, they generally charge late fees if customers do not make payment on time and other fees like processing BNPL payments by card. BNPL financing services earn much of their revenue by charging merchants, who are willing to pay to attract new consumers to their merchandise and may also be able to mark up the prices of their products to cover these costs. While some BNPL companies operate independently, others work with banks for origination. Companies operating in the BNPL space are generally nonbank financial companies such as Klarna, Afterpay, Affirm, Splitit, and Sezzle. Some BNPL companies attained high market valuations in late 2021, but since then, the market experienced a significant drop in market capitalization, and various companies are significantly below their 2021 peaks. The COVID-19 pandemic provided a ripe environment for e-commerce facilitated by BNPL. Now, consumers face inflation and higher interest rates, and BNPL providers are experiencing greater regulatory scrutiny and competition from banks. Selected Policy Issues At the federal level, the CFPB has regulatory and supervisory authority in certain nonbank consumer financial markets. While BNPL financing can provide some payment flexibility to consumers, it may pose some consumer protection risks that the CFPB focused on in its recent rule.

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