This story is part of Protocol's special report, "Buy now. Pay later. Win the future." Read more here.
President, Technology, Risk and Operations at Affirm
Traditional financial services and credit card companies have long benefited at the consumer's expense, hitting them with late and hidden fees precisely when they can least afford it. Late fees and penalties alone cost U.S. households $17 billion per year, according to Doxo.
While the rise of "buy now, pay later" has been driven by changing consumer preferences for more flexible and transparent ways to pay, many BNPL players have repackaged the same old tricks in shinier wrappers. Some BNPL providers penalize consumers as much as 25% of their purchase for being late.
Banning late fees would substantially impact BNPL as well as the financial industry at large. Many companies would need to rethink their business models, and importantly, consumers would receive far greater protection.
At Affirm, we've long envisioned a world without late fees or hidden penalties. A world where consumers know exactly how much they'll pay for something and are never charged a penny more than what they agree to at checkout, even if they're late or miss a payment. That is why with Affirm there are no late fees, ever, and this has been true since our founding about a decade ago. Our company wins when consumers manage their finances successfully.
We hope others will follow our lead and join us in our commitment to providing consumers with the best experience. And we hope they will do so even in the absence of a regulatory decision.
Director, Public Policy & Regulatory Affairs at Afterpay
Collaboration and guidance are going to be the most important ways regulators and policymakers can shape the future of the BNPL market while continuing to offer consumers empowering choices when it comes to how they make purchases.
Policymakers should collaborate with the industry to better understand both consumer needs related to spending and planning, as well as the consumer outcomes. For many of Afterpay's customers, the greatest need is to have an alternative to credit cards that empowers them to better manage and plan their spending over time.
Informed guidance should come from orienting around improved outcomes for consumers and considering the protections and benefits provided by BNPL services. Policymakers will find that BNPL companies like Afterpay have made some of the most significant and meaningful strides in terms of financial inclusion to offer opportunities for consumers to continue making purchases of goods and services that they need. More consumers have chosen BNPL during times of uncertainty as well as stability, while avoiding a cycle of debt they might face from other products across the spectrum.
Afterpay has been collaborative with policymakers in all the countries where it operates and I look forward to continuing to work closely with regulators and policymakers in understanding how consumer demands evolve, and how we can build frameworks that support beneficial outcomes for consumers.
The biggest regulatory move that could impact the BNPL market is if state regulators redefine BNPL businesses as traditional lenders. They would then be subject to the same state usury limits that protect consumers from loansharking.
BNPL businesses have long escaped existing government regulations by claiming that they coordinate and facilitate installment payment plans on behalf of the consumer, rather than issue loans like traditional lenders. However, BNPL businesses actually have much more in common with traditional lenders like banks and credit card issuers — both heavily regulated under federal and state laws. BNPL businesses assess credit risks of consumers and profit off those risks — even if they don't always conduct hard credit checks. Similarly, BNPL businesses can charge their users interest, late payments, issuance and processing fees.
Furthermore, consumers that use BNPL services face the same risks associated with general consumer lending; a Credit Karma study showed 40% of BNPL consumers in the U.S. missed more than one payment; 72% ended up with lower credit scores.
We've seen early signs of regulation, for example: In 2020, California's Department of Business Oversight charged Afterpay for charging fees for making illegal loans. As a result of the case, Afterpay refunded $900,000 to consumers and paid a $90,000 administrative fee. While these fees and charges are mere crumbs for large BNPL players like Afterpay, look out for other states to follow California's lead, especially pro-consumer states like New York.
One of Laybuy's largest growth markets is the U.K., where regulation has, rightly, been the topic of much debate. Regulation for the sector is also growing in importance as the sector welcomes an increasing number of new entrants.
BNPL is a low-risk payment method but, clearly, there is a concern about the affordability and potential of debt for customers using BNPL services; it is a concern we share. What we would most like to see is creditworthiness checks made compulsory for all BNPL providers. For example, we're the only BNPL provider to conduct hard credit checks on customers and have always worked with credit reference agencies. Our default rates are low, but if a customer does get into trouble and falls behind on payments, then there is a clear line of communication and will always work with the customer and support them. We will also soon be the first BNPL provider that can help customers improve their credit score.
Done correctly and proportionately to the risks, introducing regulation will raise standards across the entire sector. Some players might not welcome this added step, but it is important the entire industry is held to the same high standards and customers are always treated fairly. It is also something the majority of BNPL customers support, as some research we are soon to release has revealed.
We welcomed the Woolard Review published by the U.K.'s Financial Conduct Authority earlier this year, which focused on ensuring the entire industry works in the interest of consumers. We look forward to working with government ahead of the forthcoming consultation and regulations for the BNPL sector.
A regulatory move that recognizes Buy Now, Pay Later for the value it is and targets our go-to-market approach. Antiquated banking regulations do not lend themselves to the flexibility and capabilities within the BNPL market.
While BNPL is a different product from a consumer standpoint, and has different philosophy and consumer value behind it, the financing element itself is still subject to the various laws and regulations that are and have already been in place. Thus lenders, such as banks, as well as technology service providers like ourselves, should focus on building transparent and compliant technology platforms. We believe that consumers are able to distinguish those who fit within the parameters of existing regulations and those who toe the line. Consumers and regulators will appreciate BNPL technology providers that create real value and build technology platforms that bring much needed financing for non-discretionary purchases offered to consumers in a fair, transparent manner.
We also hope that all lenders and technology companies operating in the space will take a similar position and focus on great user experience and compliant and transparent products.
Kevin McAllister ( @k__mcallister) is a Research Editor at Protocol, leading the development of Braintrust. Prior to joining the team, he was a rankings data reporter at The Wall Street Journal, where he oversaw structured data projects for the Journal's strategy team.