The question of the day is, “Will BNPL begin to fizzle without regulatory guardrails, and will Merchants and consumers ultimately reject loose lending?
Like it or not, creditors are responsible for keeping their consumers out of trouble by ensuring the consumer can repay their debt. In the United States, the Card Act of 2009 covers this in § 1026.51(a):
Consideration of ability to pay. A card issuer must not open a credit card account for a consumer under an open-end (not home-secured) consumer credit plan, or increase any credit limit applicable to such account, unless the card issuer considers the consumer’s ability to make the required minimum periodic payments under the terms of the account based on the consumer’s income or assets and the consumer’s current obligations.
In short, creditors need to ensure the consumer can pay the loan terms based on their current financial situation. That is good for the lender and good for the consumer—neither party benefits when the loan starts with a limited ability to repay.
The U.S. is not alone in this requirement. In the UK, for example, lender responsibilities are just as clearly laid out in this document by the Financial Conduct Authority, titled “Preventing Financial Distress by Predicting Unaffordable Consumer Credit Agreements: An Applied Framework.”
The problem is that although regulated financial institutions have precise requirements, many fintechs are not covered because they are outside the regulatory boundaries.
This brings us to today’s read from Yahoo. Where a personal finance correspondent talks about “A Fifth of Buy Now, Pay Later Users Struggling to Repay Christmas Spending.” The short story is that unqualified consumers get quickly over their heads when lenders fail to govern the ability to repay. According to the referenced survey:
- More than two-fifths (44%) of UK adults who used a BNPL scheme to fund their Christmas shopping are now concerned about their ability to repay, the research found.
- A fifth (20%) of shoppers who used buy now, pay later (BNPL) schemes over Christmas will be unable to meet their repayments without borrowing more money, a survey suggests.
- Concerns have been mounting about some consumers taking on unsustainable debts. But it has also been argued that, when used responsibly, such schemes can help prevent people from turning to higher-cost forms of credit to finance purchases.
- However, the findings also suggest that schemes may encourage unnecessary spending, as nearly a third (32%) felt it made them spend more than they usually would, and more than two-fifths (44%) bought more extravagant gifts.
No one wants to be a grinch, but it is important to protect people from themselves given current economic times.
We’ve previously mentioned that BNPL is a worthwhile, recently defined lending form, but it requires regulatory direction. Regulations ensure business continuity and protect consumers. Ability to Repay is only one of several essential consumer protections. Another is in return policies and disclosures. As an example, Regulation Z, also known as Truth in Lending, protects consumers; Experian puts it well in their summary: “Regulation Z is a federal law that standardizes how lenders convey the cost of borrowing to consumers. It also restricts certain lending practices and protects consumers from misleading lending practices.”
Consider refund policies on electronic commerce. Reg Z provides specific consumer rights to ensure quality, accuracy, and consumer satisfaction. A similar approach in the UK is the Consumer Rights Act of 2015.
Which? A UK consumer-focused journal, published a study on the unevenness of consumer protections. A concern is that while BNPL pushes into smaller businesses, that return policy may not be as good as top retailers.
- The new breed of BNPL schemes is fast and easy to sign up to when shopping online, allowing you to borrow within a few clicks and without hard credit-checks. But, if you’re thinking of using one to pay for something online, it’s important to check the retailer’s T&Cs before placing an order.
- But our research found more than 170 online retailers, listed on at least one of the BNPL firms’ apps or websites, whose returns and faulty goods policies are incorrect or unclear.
- This policy is contrary to the Consumer Contracts Regulations, giving you rights to cancel most online orders for goods from the moment they are placed, up until 14 days of receiving the goods. ‘It surprises me that Laybuy doesn’t carry out all the relevant checks,’ the customer told us. ‘I would never have found this company if they weren’t on the Laybuy seller page.’
Here is the key:
- Of the retailers, we found issues with: 95 don’t offer refunds on sale items 74 don’t give customers the minimum length of time to return orders 36 do not adhere to rules on returning faulty goods 17 don’t offer refunds at all 16 charge fees for making returns The Consumer Contracts Regulations gives you rights to return items when shopping online. There are some circumstances where the Consumer Contracts Regulations won’t give you a right to cancel. These include perishable items, tailor-made or personalized items, and goods with a seal for hygiene reasons. For most items, though, you have a minimum of 14 days after receiving an order to notify a retailer that you’d like to make a return and a further 14 days after this to send the items back.
The challenge is simple. Fintechs certainly have a right to bring new products to market. In the case of BNPL, the product can be a winner. But, consumers need boundaries that ensure what they buy can be paid. They also need clarity and protection from shoddy goods. Merchants must-see BNPL as another payment option and be confident that they will not lose a future sale due to dissatisfaction. For growing BNPL firms, the last thing you want to known as is a sloppy lender.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group