Even as BNPL (buy now, pay later) business suffers in India due to regulatory action, Bank of International Settlements and a top US banking regulator has warned on the pitfalls of the avenue of credit.
The US Office of the Comptroller of the Currency, an independent arm of the US Treasury, warned banks to manage the risks to consumers posed by increasingly popular “buy now, pay later” financing for retail spending, saying the service creates pitfalls for retail shoppers.
The warning that came amid the ongoing shopping season was the latest sign that federal regulators are scrutinising the increasingly popular form of consumer credit.
BNPL loans allow borrowers to pay off a purchase in four or fewer interest-free instalments but regulators warn they can lead to trouble, leaving unsuspecting borrowers overextended.
What BIS says
Buy now, pay later (BNPL) plans have been marked by higher delinquency rates even as growth and enthusiasm for those payment offerings have soared, the Bank for International Settlements (BIS) said.
“The rapid ascent of BNPL could be of concern to public authorities for two reasons: consumer protection issues and the accumulation of credit risk. It is thus important to establish whether BNPL schemes take advantage of financially constrained individuals through misleading promotions and inadequate information,” contended the BIS. “In turn, since BNPL platforms suffer from high delinquency rates, a sustained growth of these platforms would warrant monitoring of their direct and indirect links with the rest of the financial system.”
In its quarterly review discussing financial trends, the Bank for International Settlements (BIS) reported a robust growth in Buy Now, Pay Later (BNPL) services, particularly in countries with flourishing e-commerce, higher inflation, less efficient banking systems, and lax regulations. The BIS highlighted the popularity of BNPL among younger adults with heavier debt loads and lower credit scores, noting that millennials and Generation Z individuals rely less on credit cards and exhibit lower financial literacy.
The BIS findings revealed that BNPL platforms conduct softer credit checks, collecting less data for creditworthiness determination compared to traditional checks. Merchants, while transferring credit risks to BNPL platforms and paying fees, face profitability challenges due to high operating costs and increasing credit losses.
Despite the rising popularity of BNPL services, providers such as Afterpay and Klarna have struggled with profitability, operating with high fixed costs. Many BNPL credit agreements currently fall outside existing regulatory frameworks, prompting some governments to consider regulatory amendments. For example, in Australia, proposals include lending fee caps and enhanced warning and disclosure requirements, while in the U.S., providers may need state licensing, registration, and compliance with consumer credit laws.
The US experience
According to a PYMNTS Intelligence report, 16 per cent of US consumers (40.5 million people) used BNPL for at least one payment in a given month. Additionally, 43 per cent of BNPL users indicated that they would have delayed a purchase or chosen a more affordable product if BNPL were not available. The report disclosed that 16 per cent of BNPL users made weekly purchases, with an additional 25 per cent making monthly transactions. Notably, BNPL usage surged by 72 per cent in the week preceding Thanksgiving, and consumers using BNPL for Black Friday retail purchases spent 32 per cent more than those who did not.
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