The exploding use of buy now, pay later (BNPL) needs to have some oversight governing that growth, Omri Flicker, chief legal and risk officer at Splitit, told PYMNTS.
The conversation came against a backdrop in which the Consumer Financial Protection Bureau (CFPB) found many BNPL users use the option without signs of stress.
But some signs bear watching — particularly the fact that BNPL-using respondents had higher levels of credit card debt and rates of credit card utilization compared to non-BNPL users.
And amid the data, said Flicker, of particular note is the finding that roughly 90% of BNPL users have open credit cards.
“That was something, perhaps, that was not expected in the industry,” he said.
At a high level, the report illuminates the fact that consumers are always going to use a broad range of financial products. He said the conventional wisdom may be that BNPL options serve as an alternative to credit cards and represent an opportunity for underserved populations to have their “first taste of credit in order to build credit histories. But the numbers tell us that this is not necessarily true.”
In tandem with credit cards, he said, the data shows that BNPL users are likely to use diverse offerings to meet the obligations of living daily financial life — including, but not limited to, overdraft facilities, payday loans and pawn loans.
As to the warning signs, the CFPB has noted that a significant percentage of BNPL users have negative liquidity — and the balances on their cards are more than the limits that were authorized by the banks.
“That can be a real problem, and the credit agencies look at utilization above 30% as a potential sign of distress,” he said. “But again, we’re not talking about the entire population of BNPL users.”
There’s evidence that BNPL users are opting to leverage the offering to pay for a growing slice of everyday expenses. But, where the CFPB report noted that traditional credit represented a relatively more expensive option — card interest rates can top 20% — Flicker cautioned that some BNPL providers can make installment loans prohibitively expensive by tacking on fees.
“These can be the interest rates that are associated with BNPL in the event of missed payments,” he said. “There’s an overall lack of standardized disclosures — pre-purchase and post-purchases — and no uniform reporting to credit bureaus.”
In looking ahead, he said opportunity lies with regulators such as the CFPB instituting some of that much-needed standardization, with some inspiration taken from the card industry (and from countries such as Australia, where those efforts are underway). There’s room for industry-wide credit reporting and a dispute resolution process that clearly delineates the obligations of third-party providers and borrowers.
And there’s likely to be continuing debate over data harvesting and use, he said. Splitit, by way of example, does not sell that data and instead operates with a model where consumers use their cards to guarantee a purchase by placing a hold on their credit card, while the total amount is outstanding — and paying down the balance over time.
In that way, he added, the “the credit card regulatory regime makes a lot of sense — and we’re trying to stay within that regime. There are a lot of consumer protections there — and so we think the interest in BNPL by regulators should be welcomed.”
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