The Office of the Comptroller of the Currency (OCC), the main regulator of national banks in the United States, has issued a bulletin warning banks and consumers about the potential risks of ‘buy now, pay later’ (BNPL) products. These are short-term loans that allow customers to purchase goods or services online and pay later in installments, usually without interest or fees.
What are the benefits and drawbacks of BNPL products?
According to the OCC, BNPL products can offer benefits to both banks and consumers, such as increasing sales, customer loyalty, and access to credit. However, they also pose significant risks, such as:
- Credit risk: Banks may face losses if consumers default on their payments or if the merchants that partner with BNPL providers go bankrupt.
- Compliance risk: Banks may violate consumer protection laws or regulations if they do not disclose the terms and conditions of BNPL products clearly and accurately, or if they charge excessive fees or interest rates.
- Operational risk: Banks may experience operational failures or disruptions due to the reliance on third-party BNPL providers, which may have inadequate security, governance, or controls.
- Reputation risk: Banks may damage their reputation and trustworthiness if they offer BNPL products that are unfair, deceptive, or abusive to consumers, or if they fail to resolve consumer complaints or disputes.
How can banks and consumers mitigate the risks of BNPL products?
The OCC advises banks to adopt sound risk management practices when offering or partnering with BNPL providers, such as:
- Conducting due diligence: Banks should assess the financial condition, performance, and reputation of BNPL providers, as well as their compliance with applicable laws and regulations, before entering into any agreements or contracts.
- Establishing clear policies and procedures: Banks should establish and implement policies and procedures that govern the origination, servicing, and collection of BNPL products, as well as the oversight and monitoring of BNPL providers.
- Ensuring transparency and disclosure: Banks should ensure that BNPL products are marketed and disclosed in a clear, accurate, and timely manner, and that consumers are informed of their rights and obligations, including the fees, interest rates, and penalties that may apply.
- Providing consumer education and assistance: Banks should provide consumers with educational materials and tools that help them understand the benefits and risks of BNPL products, as well as the alternatives and resources available to them. Banks should also provide consumers with effective and accessible channels to report problems, request information, or file complaints.
The OCC also urges consumers to be cautious and informed when using BNPL products, such as:
- Comparing options and costs: Consumers should compare the terms and conditions of BNPL products with other forms of credit, such as credit cards, personal loans, or overdrafts, and consider the total cost and affordability of each option.
- Reading the fine print: Consumers should read and understand the contract or agreement of BNPL products, and pay attention to the fees, interest rates, and penalties that may apply, as well as the dispute resolution and cancellation processes.
- Managing payments and budgets: Consumers should keep track of their payments and balances, and avoid missing or late payments that may result in additional charges or negative impacts on their credit scores. Consumers should also plan and budget their spending and borrowing, and avoid taking on more debt than they can handle.
What are the trends and challenges of BNPL products?
BNPL products have become increasingly popular in recent years, especially among younger and online shoppers, who value convenience, flexibility, and affordability. According to a report by Worldpay, BNPL products accounted for 8% of global e-commerce spending in 2020, and are expected to grow to 17% by 2024, making them the fastest-growing online payment method in the world.
However, BNPL products also face several challenges and uncertainties, such as:
- Regulatory scrutiny: BNPL products are subject to different and evolving regulatory frameworks in different jurisdictions, which may create compliance and operational challenges for banks and BNPL providers. For example, in the United States, BNPL products may fall under the jurisdiction of various federal and state agencies, such as the OCC, the Consumer Financial Protection Bureau, the Federal Trade Commission, or the state attorneys general, depending on the nature and structure of the products and the entities involved.
- Consumer protection issues: BNPL products may raise consumer protection issues, such as unfair, deceptive, or abusive acts or practices, or violations of the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, or the Fair Debt Collection Practices Act. For example, some BNPL products may not conduct credit checks or report payment history to credit bureaus, which may limit consumers’ ability to build or improve their credit scores, or to access other forms of credit in the future.
- Competitive pressure: BNPL products may face increasing competition from other players in the market, such as traditional banks, credit card companies, fintech firms, or e-commerce platforms, which may offer similar or better products or services to consumers. For example, some credit card companies have launched their own BNPL products, such as Chase’s My Chase Plan or American Express’ Pay It Plan It, which allow consumers to split their purchases into fixed monthly payments with no interest or fees.
