The popularity of Buy Now, Pay Later (BNPL) services in e-commerce is growing. Researchers estimate that global consumers spend $100 billion globally in BNPL transactions annually and expect BNPL services to account for 12 percent of all e-commerce payments by 2025. Marketed as a solution for consumers who dislike, do not use, or do not trust credit cards, BNPL services offer short-term unsecured loans at the point of purchase by allowing consumers to pay for their purchase in installments. However, unlike other unsecured consumer loans, major regulations aimed at consumer loans often do not cover BNPL services and loans, and BNPL loan usage is often unreported to consumer credit reporting agencies like TransUnion. As a result, loan providers may overextend credit due to a lack of information and consumers may incur significant debt. To increase transparency and education around these new forms of credit, Congress should revise the Truth in Lending Act (TILA) to account for BNPL services by extending the Act to loans with four or fewer payments and require BNPL services to report usage to consumer credit bureaus.
The Truth in Lending Act, a landmark law enacted in 1968, requires extensive disclosures to consumers about their loans. Disclosures contain key information that consumers need to make financial decisions, such as the annual percentage rate, the total lifetime cost of a loan, including interest and fees, the number of payments, late fees, and the total sum of payments. Consumers can use this information to compare and shop for loans. TILA also protects consumers if a lender does not disclose or misrepresents this information. However, TILA only affects consumer loans split into five or more payments.
Buy Now, Pay Later (BNPL) payment services resemble consumer layaway for the e-commerce era, with a key difference. Unlike layaway, when consumers slowly pay for purchases before receiving the goods, BNPL allows consumers to purchase and receive goods or services immediately and receive a short-term loan that is paid back in installments. Some services offer a fixed number of installments, while others allow the customer to choose the number of installments. One of the most common practices is splitting the purchase into four installments. These loans are not covered by TILA, and the missed payment fees, late payment fees, and interest rates can be as high or higher than other consumer loans or credit cards.
BNPL providers approve consumers for these short-term loans at the point-of-purchase using a quick approval process that relies on a “soft pull” of the customer’s credit history that does not impact a consumer’s credit score. However, BNPL providers generally do not report these loans to credit bureaus. As a result, consumers can have significant debt in BNPL services, but that information is not included in their credit report—a problem for any lender, including other BNPL services, that needs to determine a potential consumer’s creditworthiness. Without this data, lenders may overextend credit to consumers, through BNPL loans, credit cards, auto loans, or mortgages, increasing the risk of a potential default on debt consumers can’t repay.
BNPL services have become popular with consumers. In 2020, BNPL loans accounted for around 11 million of the approximately 12 million consumer loans issued in California. Industry researchers found that Gen Z consumers increased their use of BNPL products from 6 percent in 2019 to 36 percent in 2021. But consumers are taking on more debt than they can afford with BNPL loans.. In a viral Tik Tok, one user was surprised to find that her total loan balance for a BNPL service was more than $2,000–she believed it was “maybe $300.” A survey by Credit Karma found that 30 percent of Gen Z consumers who used a BNPL loan missed at least two payments and nearly half of Gen Z consumers have missed at least one payment, and the Consumer Financial Protection Bureau reported 10.5 percent of consumers were charged late fees at least once.
Consumer protection groups are warning consumers about the potential drawbacks of these services. The Washington state Better Business Bureau launched a campaign to educate consumers on BNPL services and the potential impact of consumer debt during back-to-school shopping, and the United Kingdom’s Financial Conduct Authority issued warnings to BNPL firms for misleading advertisements. But consumer education isn’t enough.
Congress should modernize TILA to reflect pay-in-four, pay-in-three, and even pay-in-two models. This expansion will increase consumer awareness of the total cost of a purchase using BNPL by making disclosures obligatory. Congress should also require BNPL services to report consumer loans to credit reporting services. This reporting would help consumers understand their debt level and increase lending accuracy. This reporting would also inform the lenders and retailers of the risk of consumers’ default on relevant loans. Improving information on both sides of the loan would reduce risky BNPL supply and demand.
BNPL services represent a significant advancement in e-commerce payment services and help consumers spread the payment for products over time. However, regulatory gaps around these services present a risk to both consumers and lenders. Modernizing TILA to cover BNPL and including BNPL loans in consumer credit reports would protect consumers in the e-commerce era.
