Annual reports by state regulatory agencies aren’t typically top of the reading list for most people and definitely not considered must-read briefing material for busy legislators. But this fall, the California Department of Financial Protection & Innovation published three statistics in their 2020 report that were almost immediately brought to the attention of elected representatives.
- Consumer lending in California didn’t merely increase in 2020; it more than sextupled.
- 91% of those loans were of the Buy Now Pay Later variety.
- The average amount of a BNPL payment was $109.84.
Let that sink in. Buy Now Pay Later is not just a headline or a fad, it represented most loans in CA last year. Consumers weren’t just using BNPL for Peloton bicycles and other big-ticket items (a commonly held belief in Fintech circles.) They were using BNPL for everything.
This was concerning for several reasons. First, it was unclear the extent to which consumers understood the risks of BNPL. Among the big risks were getting hit with overdraft fees from banks for automated debits and fees and credit damage associated with missed payments. Second, consumers with great repayment histories were not seeing their stalwart borrower activity reflected in their credit scores, potentially affecting their cost of credit.
Congressional representatives demanded more information, and the House Financial Services Committee responded by holding a hearing in early November featuring a mix of researchers, consumer advocates, and industry representatives. I found the most interesting testimony came from Peggy Lee, CEO, Financial Technology Association, who reported that credit providers in her organization counted 45 million BNPL users in the United States. In 2020, those users spent $21 billion. “Now, that might seem like really large numbers,” Lee said. “But it’s also only 2% of the overall online retail spend.”
To me, this supports the possibility that we are seeing a generational shift in consumer awareness of and demand for more personalized and safer financing.
Committee members asked lots of thoughtful questions, including whether BNPL should only be offered to users of a certain age and whether BNPL payments should be regulated as loans. Their goal was a laudable one — to find ways to make BNPL safer for borrowers, and it’s no surprise that the industry representatives on the panel favored self-regulation.
Reading through the testimony as a provider of core BNPL technology, I found myself wanting to chart a clearer course for our industry and my fellow BNPL users. There are indeed steps that credit providers can take to increase borrower safety — and support broad innovation in lending.
Here are a few:
- Clearly communicate how BNPL works to borrowers in real time, at the point of sale, using the customer’s preferred communication channel and document that communication.
- Survey customers to discover any gaps in their understanding of BNPL products and transparently share your survey results.
- Be aware of any overdraft fees associated with customer accounts and get permission to do a balance checks when relevant. Communicate with customers who are at risk of overdraft fees.
- Put a policy in place that works for the borrower, the bank, and the BNPL provider to mitigate the impact of late/missed payments (for example, a credit provider could temporarily convert a missed payment into a revolving line of credit that could accrue interest).
- Work with the credit bureaus to create a classification for BNPL loans that would not punish individuals who make frequent use of BNPL as “repeat borrowers” but would instead reward them for their payback history.
- Be transparent about all the credit risks of nonpayment (Negative credit bureau reports can be made a lender of record or another third-party financier.)
For decades, lenders and the borrowers they serve have been hamstrung by traditional core lending infrastructure that limited the kinds of products they could provide. This is no longer true. A modern core and loan management and servicing system enable product differentiation far beyond BNPL.
Getting BNPL right means putting the customer first. BNPL is the first significant lending innovation to take advantage of on-demand, digital technologies. Getting BNPL right will set a precedent for a whole new generation of safer, transparent, and personalized lending products that incorporate current and emerging innovations.
It’s a future that seems just around the corner, but we shouldn’t take it for granted. We need balanced and thoughtful regulation — with full industry participation — to turn the promise of safer and personalized lending into a reality. And so, I offer these ideas up for discussion. If implemented in some form, they could go a long way to reducing risk for borrowers and lenders. Let’s iterate and improve on them.