Capitol Hill: BNPL has advantages, increasing risks

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Buy now, pay later (BNPL) plans and other financial innovations such as Profit managers said on Tuesday (November 2nd).

The House Financial Services Subcommittee hearing was titled “Buy Now, Pay More Later? Investigate the risks and benefits 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 her testimony that FinTechs can help fill the racial wealth gap that exists in the United States. As she noted, the same firms can “develop inclusive financial services products for people who are not creditworthy or those with poor creditworthiness”.

Broady found that offering accounts with no overdraft fees or minimum balance can help reduce the impact of otherwise volatile income and expenses. She pointed to BNPL options that allow interest-free purchase now and payment later so that consumers can “conveniently make purchases and distribute payments when they are 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 creditworthiness.

Elsewhere, Lauren Saunders, assistant director of the National Consumer Law Center, said in her own testimony, “Some new types of financing products are seizing opportunities that arise from gaps or failures in the current marketplace. If they are well designed, they can meet consumer needs. ”

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

“Even credit products that can help consumers manage their finances need to be covered by basic consumer protection measures, including interest rate caps, repayment insurance, cost transparency, dispute settlement rights and fair lending laws,” said Saunders.

She argued that some BNPL options could trick consumers into “taking on debts they cannot afford to pay back, and managing frequent, irregular BNPL payments can be challenging”. Alluding 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 austerity programs and affordable small-dollar installment loans,” Saunders said. BNPL, she warned, shouldn’t be seen as a way to build underserved populations or provide credit – in part due to the fact that payments are not reported to credit bureaus, but missed payments are.

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

Among other recommendations, she said the Consumer Financial Protection Bureau (CFPB) should ensure that BNPL lenders do not grant loans until the borrower is determined to be able to repay, taking into account income and expenses or obligations. With the increase in BNPL use, the risks have risen “to a large and increasing extent”.

When asked by Rep. Stephen Lynch, D-Mass, about outages at BNPL, Saunders cited data from Credit Karma showing that 34% of consumers who tried BNPL loans were behind with one or more installment payments .

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

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