Page 34 - GS230201

Education

Offering BNPL Risk and regulatory oversight

options in 2023 The BNPL industry is less transparent than legacy credit
products. The lack of transparency stems from the rela-
tively sparse information available to the public and the
By Bill M. Petti lack of BNPL loan repayment standards to address fur-
nishing to the Nationwide Consumer Reporting Compa-
Global Legal Law Firm nies. Conversely, once the consumer enters into a BNPL

uy now, pay later (BNPL) allows consumers to installment payment program, they are usually provided
make purchases online over a series of install- with limited disclosures about the terms and fees associ-
ated with the installment loan. The longer-term, interest-
ments. Innovated in Australia, this method of
B payment blew up during the pandemic, during bearing loans similarly lack transparency and uniformity
regarding the repayment terms and interest, which results
which time consumers shifted almost primarily to online
shopping. But what is BNPL, exactly? BNPL is a form of in confusion among consumers.
credit that allows a consumer to split a retail transaction
into smaller, interest-free installments and repay over Often, BNPL products are approved for consumer-bor-
time. Simply put, BNPL is a type of installment loan. rowers who have credit scores below 700. Because borrow-
ers habitually use BNPL products and lack the means to
timely repay the installments, they frequently default on
BNPL is most commonly offered as a pay-in-four plan. Say, their repayment obligations. When a borrower does not
for example, that a consumer purchases a $400 shirt from
an online retailer: if the consumer exercises this install- make these payments, many BNPL providers charge late
fees, often around $7 per missed payment on an average
ment plan, then the consumer will pay $100 at checkout
and the remainder in varying intervals. loan size of $135.
Typical BNPL structure The risk to merchants
Chargebacks are unlikely to affect the merchant directly
The typical BNPL structure divides a purchase, which because most BNPL offerings are structured such that the
could range from $50 to $1,000, into four equal install- consumer pays the BNPL provider, not the merchant. Still,
ments, with the first installment paid as a down payment many BNPL providers will pass the cost for chargebacks
due at checkout, and the next three due in two-week inter- on to the merchant. Merchants should consult sophisticat-
vals over six weeks.
ed counsel to review each BNPL provider’s policies prior
to entering into such BNPL partnerships. Merchants are
The largest BNPL partners are Affirm, Afterpay, Klarna, nonetheless responsible for consumer-initiated refunds.
PayPal and Zip. These providers offer consumers POS fi- For instance, PayPal’s BNPL policy requires the merchant
nancing, typically issued at 0 percent interest. Commonly, to refund the PayPal Pay in 4 loan amount due, in full or
consumers are required to pay back these loans within partial, toward the total balance.
four payments over two months. Providers like Affirm,
Klarna, and PayPal also offer longer-term, interest-bearing Merchants must be prepared to bear the cost of refund-
loans that may be described as BNPL loans by companies ing all or some of the BNPL loan amount as purchases are
that market them, but these financing options have inter- returned for refunds. Moreover, anti-money laundering
est rates which can stretch up to 36 percent. compliance controls are necessary for merchants to ac-
count for potential friendly fraud and account takeover
According to McKinsey & Co.’s 2021 study on POS financ- and the liability for such activities.
ing, metrics demonstrate that BNPL will continue to ac-
celerate in 2023 (see www.mckinsey.com/industries/financial- CFPB oversight
services/our-insights/buy-now-pay-later-five-business-models-
to-compete). Average annual transactions per account were In addition—and aside from the risks of chargebacks, re-
much larger for BNPL than for consumer purchases using funds and consumer defaults—BNPL is also the subject
private-label credit cards. of emerging regulatory oversight. On Sept. 15, 2022, the
Consumer Financial Protection Bureau issued a report on
BNPL market trends and the resulting consumer impacts
Due to increased BNPL customer engagement, even the (see www.consumerfinance.gov/about-us/newsroom/cfpb-
largest merchants that initially declined to offer BNPL study-details-the-rapid-growth-of-buy-now-pay-later-lending).
products are now integrating these payment options at The CFPB is the federal administrative agency that has
checkout. Offering BNPL options can be a very profitable enforcement and rulemaking authority over the credit in-
tool for merchants. However, there are a number of poten- dustry and BNPL providers.
tial consumer risks associated with BNPL products. What
is more, there are also risks to merchants and banks.
In its report, the CFPB found, among other things, that
many BNPL lenders have shifted toward the app-driven

34