“Buy now, pay later” (“BNPL”) is a newer consumer credit offering that financial technology companies have been offering directly via mobile apps or in collaboration with online retailers. Unlike layaway where a store would reserve an item for a customer until the consumer completed a series of installment payments; BNPL allows a customer to make a purchase and receive the item immediately but pay for it later through installment payments with no interest. There are fees for late or missed payments.

As online shopping has increased in popularity during the COVID-19 pandemic, the offerings for BNPL has increased. Most major retailers now offer some type of BNPL when checking out online. Some retailers offer it in store at the cash register. During check out, customers are provided an option to break up the total purchase and pay a smaller amount now, instead of the full balance. The remaining balance is then paid over installment payments. If the customer is interested, they fill out a short credit application directly on the checkout screen and receive instant approval. Even individuals with no credit or bad credit are usually approved.

With the increased popularity, has come new scrutiny and regulatory attention from the Consumer Financial Protection Bureau (“CFPB”). In December 2021, the CFPB issued demands on five companies that offer BNPL to supply details about their business practices. According to the CFPB press release, it is seeking information about “consumer debt accumulation, regulatory arbitrage, and data harvesting.” According to a Credit Karma Survey, of the 40% of Americans that have used BNPL, 38% have missed one or more payments . Due to the high default rate, the CFPB is concerned that consumers who use the BNPL for multiple purchases may have trouble keeping track of the loans and can end up spending more than anticipated. BNPL is not a typical credit transaction or loan and therefore may not be subject to state or federal financing laws. This opens the possibility of predatory lending where BNPL may be offered with deceptive tactics and customers end up with loans that they can’t afford.

The Credit Karma survey also reported that 72% of customers that missed a payment also reported seeing a decrease in their credit scores. For now, BNPL isn’t reported uniformly to credit bureaus. However, Experian, Equifax, and TransUnion are working to include BNPL loans on consumer creditors reports as the loans become more mainstream. This will benefit the consumers who pay on time by building their credit history. For those who have defaulted on BNPL loans, they likely will see a decrease in their credit score and the debt sent to collections.

The laws and regulations regarding BNPL continue to evolve. If you are a financial institution, business or individual that needs assistance understanding and navigating BNPL regulations, contact the experienced banking and litigation attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices.

1. Lapera, Gaby. 72% of Americans saw their credit scores drop after missing a ‘buy now, pay later’ payment, survey finds February 8, 2021. Credit Karma. 25 January 2022. https://www.creditkarma.com/insights/i/buy-now-pay-later-missed-payments.

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