Fintech

‘Buy now, pay later’ is booming. But companies are facing pressure to change.

U.S. regulators, worried about consumer debt and unregulated credit, could force the companies to rein in practices that have turbocharged their growth.

Afterpay app

Afterpay and others are facing changes.

Photo: Brent Lewin/Bloomberg via Getty Images

Click banner image for more Shopping Week coverage

This holiday season, merchants are poised to use "buy now, pay later" like never before.

Not just a hot new payments or ecommerce feature, it's also a key marketing feature to drive more sales for merchants. The growth has been quick. Consumers are expected to make $100 billion in "buy now, pay later" purchases in 2021, up from $24 billion in 2020, and could increase up to 15 times its current volume by 2025.

An indication of the flux in this new market is that there isn't even agreement about whether "buy now, pay later" purchases are in fact loans. Companies and merchants tout them as convenience features or payment plans, but more regulators and consumer advocates view them as loans that should have the same protections as credit cards or other forms of consumer credit.

Consumers' views matter, too. Right now, many shoppers see "buy now, pay later" as different from traditional credit cards. But that halo could wear off if more have bad experiences with pay-later plans.

There's no disputing the momentum behind "buy now, pay later." Beyond the pure "buy now, pay later" providers like Affirm, Klarna and Afterpay, traditional retailers like Macy's, Target and Walmart are all pushing their own "buy now, pay later" offerings — with the hopes of seeing fewer abandoned shopping carts and bigger baskets.

The companies promote "buy now, pay later" as a better alternative to credit card debt because of lower fees, low or no interest and more transparency. And many consumers, especially younger ones, have moved away from credit cards to avoid getting into debt.

But while "buy now, pay later" can offer benefits compared to credit cards, there are lurking issues that could present challenges to the companies this holiday shopping season.

Consumer confusion

In complaints to the Consumer Financial Protection Bureau, consumers have said that they've had problems with purchases, either because they couldn't make a return or get a refund, or got charged with fees they didn't understand.

Consumers also do not always understand the risks of these products, said Rachel Gittleman, financial services outreach manager at Consumer Federation of America.

"These products are credit and carry the same consequences for defaulting as other types of loans," she wrote in a letter to the House Financial Services Committee.

This kind of confusion can lead to consumers falling behind on payments. In a recent study by Credit Karma, one-third of consumers who used "buy now, pay later" products had fallen behind on one or more payments, and 72% of them said their credit score dropped.

In its September quarter, Affirm's delinquencies over 30 days were about 2.6%, ticking up considerably from the overall fiscal year where they were 1% as the company has sought to open up to a broader range of consumers. Affirm has said that it underwrites each transaction individually using data beyond credit scores, rather than extending a line of credit, to ensure consumers can repay.

Afterpay's net transaction loss as a percentage of overall sales was 0.6% for its year ending in June. Afterpay says 95% of transactions do not incur a late fee and close to one-third of customers make the majority of payments early. To ensure people don't get too far into debt, Afterpay suspends consumers from its system if they are late for a payment.

"Even when people do pay the installments, there's likely a higher number of people who are also at the same time racking up credit card debt," said Melody Brue, principal analyst at Moor Insights & Strategy. "It's sort of ironic that some of these 'buy now, pay later' options are meant to be for people not tapping into credit, but they actually are."

If consumers rack up debt or complaints rise, the companies could lose customers — or money, if the loans don't get paid back. This could undermine one of the big claims for "buy now, pay later": that it's cheaper, easier and better for consumers' credit than a credit card.

The regulatory hammer

Right now, "buy now, pay later" is not regulated in the way that credit cards are. That means there are no standards for disclosures on fees, amounts owed, credit reporting and payments. Even the due date of a "buy now, pay later" payment is not as clear as a credit card with a consistent payment date.

"Right now, one of the biggest issues is that they're operating pretty much largely outside of the regulatory system and outside of federal and state oversight for a variety of different reasons," Gittleman said.

That could change as regulators rein them in.

The U.K. and Australia, where "buy now, pay later" has taken off even faster than in the U.S., have placed these products under a regulatory regime. In the U.K., the Financial Conduct Authority in February said "buy now, pay later" would come under its rules after finding that consumers thought the products carried the same "rights and protections" as regulated forms of credit. The Australian Finance Industry Association created a code of conduct for "buy now, pay later" after a Senate inquiry.

In the U.S., "buy now, pay later" services are covered under the Dodd-Frank Act's protections for deceptive or abusive lending practices, which are enforced by the Consumer Financial Protection Bureau. The CFPB has issued a warning to consumers on "buy now, pay later," and has already brought a case against one company offering income-share agreements, a possible indication of broader intentions on consumer credit.

But "buy now, pay later" often isn't covered by the federal Truth in Lending Act, which requires disclosure of terms and cost of services, since it typically only applies to purchases with five or more installments.

Even though most "pay-in-four" products are exempt from those federal rules, California has classified some pay-later products as loans. The California Department of Financial Protection and Innovation settled with three "buy now, pay later" companies last year over charges they had made illegal loans.

As a measure of Congress' increasing interest, the House Financial Services Committee recently held a hearing entitled "Buy Now, Pay More Later?" Legislators are concerned about consumer protections, disclosure, credit reporting and consumers taking on unsustainable debt.

"The pay-in-4 business model ... has been criticized by some for being specifically designed to evade lending regulation such as the Truth in Lending Act," Democratic Rep. Stephen Lynch said.

But pay-later companies say that delinquency rates are low overall and lower than credit cards. Klarna has said its delinquency rate is less than 1% globally. The companies say they use sophisticated underwriting to select consumers that are able to pay back their debts.

However, many "buy now, pay later" companies only do a soft credit check, if any. If they don't do a hard credit check, they won't know when consumers are using multiple "buy now, pay later" providers — and therefore don't really know whether consumers can pay for their purchases.

"There are troubling indications that BNPL products may lead consumers to incur debt they cannot afford to repay. Disturbingly, part of the business model of some BNPL providers may count on consumers who do not pay on time and who incur late fees," said Lauren Saunders, an associate director at the National Consumer Law Center, at the House hearing. PayPal recently eliminated late fees, matching Affirm's longstanding practice, while Klarna and Afterpay do charge late fees.

It's unclear if or when regulators will force changes in "buy now, pay later." Brue said that the industry "is certainly ripe for regulation … I do think that there's a need for more regulation around it, or there's just a need for the industry to come up with some standards and shared visibility into consumer debt."

The companies have already made some changes ahead of regulation, and could make more. Last month, in response to the U.K.'s upcoming crackdown, Klarna added a "pay now" option for consumers to pay what they owe in full.

"Buy now, pay later" companies grew quickly by filling a need for cheaper, more convenient credit — and exploiting some gaps in regulation. But like other startups in regulated industries, they will have to come to figure out how to fit into the existing rules. Otherwise regulators may well figure it out for them. The question is what those changes will cost them.

Climate

A pro-China disinformation campaign is targeting rare earth miners

It’s uncommon for cyber criminals to target private industry. But a new operation has cast doubt on miners looking to gain a foothold in the West in an apparent attempt to protect China’s upper hand in a market that has become increasingly vital.

It is very uncommon for coordinated disinformation operations to target private industry, rather than governments or civil society, a cybersecurity expert says.

Photo: Goh Seng Chong/Bloomberg via Getty Images

Just when we thought the renewable energy supply chains couldn’t get more fraught, a sophisticated disinformation campaign has taken to social media to further complicate things.

Known as Dragonbridge, the campaign has existed for at least three years, but in the last few months it has shifted its focus to target several mining companies “with negative messaging in response to potential or planned rare earths production activities.” It was initially uncovered by cybersecurity firm Mandiant and peddles narratives in the Chinese interest via its network of thousands of fake social media accounts.

Keep Reading Show less
Lisa Martine Jenkins

Lisa Martine Jenkins is a senior reporter at Protocol covering climate. Lisa previously wrote for Morning Consult, Chemical Watch and the Associated Press. Lisa is currently based in Brooklyn, and is originally from the Bay Area. Find her on Twitter ( @l_m_j_) or reach out via email (ljenkins@protocol.com).

Some of the most astounding tech-enabled advances of the next decade, from cutting-edge medical research to urban traffic control and factory floor optimization, will be enabled by a device often smaller than a thumbnail: the memory chip.

While vast amounts of data are created, stored and processed every moment — by some estimates, 2.5 quintillion bytes daily — the insights in that code are unlocked by the memory chips that hold it and transfer it. “Memory will propel the next 10 years into the most transformative years in human history,” said Sanjay Mehrotra, president and CEO of Micron Technology.

Keep Reading Show less
James Daly
James Daly has a deep knowledge of creating brand voice identity, including understanding various audiences and targeting messaging accordingly. He enjoys commissioning, editing, writing, and business development, particularly in launching new ventures and building passionate audiences. Daly has led teams large and small to multiple awards and quantifiable success through a strategy built on teamwork, passion, fact-checking, intelligence, analytics, and audience growth while meeting budget goals and production deadlines in fast-paced environments. Daly is the Editorial Director of 2030 Media and a contributor at Wired.
Fintech

Ripple’s CEO threatens to leave the US if it loses SEC case

CEO Brad Garlinghouse said a few countries have reached out to Ripple about relocating.

"There's no doubt that if the SEC doesn't win their case against us that that is good for crypto in the United States,” Brad Garlinghouse told Protocol.

Photo: Stephen McCarthy/Sportsfile for Collision via Getty Images

Ripple CEO Brad Garlinghouse said the crypto company will move to another country if it loses in its legal battle with the SEC.

Garlinghouse said he’s confident that Ripple will prevail against the federal regulator, which accused the company of failing to register roughly $1.4 billion in XRP tokens as securities.

Keep Reading Show less
Benjamin Pimentel

Benjamin Pimentel ( @benpimentel) covers crypto and fintech from San Francisco. He has reported on many of the biggest tech stories over the past 20 years for the San Francisco Chronicle, Dow Jones MarketWatch and Business Insider, from the dot-com crash, the rise of cloud computing, social networking and AI to the impact of the Great Recession and the COVID crisis on Silicon Valley and beyond. He can be reached at bpimentel@protocol.com or via Google Voice at (925) 307-9342.

Policy

The Supreme Court’s EPA ruling is bad news for tech regulation, too

The justices just gave themselves a lot of discretion to smack down agency rules.

The ruling could also endanger work on competition issues by the FTC and net neutrality by the FCC.

Photo: Geoff Livingston/Getty Images

The Supreme Court’s decision last week gutting the Environmental Protection Agency’s ability to regulate greenhouse gas emissions didn’t just signal the conservative justices’ dislike of the Clean Air Act at a moment of climate crisis. It also served as a warning for anyone that would like to see more regulation of Big Tech.

At the heart of Chief Justice John Roberts’ decision in West Virginia v. EPA was a codification of the “major questions doctrine,” which, he wrote, requires “clear congressional authorization” when agencies want to regulate on areas of great “economic and political significance.”

Keep Reading Show less
Ben Brody

Ben Brody (@ BenBrodyDC) is a senior reporter at Protocol focusing on how Congress, courts and agencies affect the online world we live in. He formerly covered tech policy and lobbying (including antitrust, Section 230 and privacy) at Bloomberg News, where he previously reported on the influence industry, government ethics and the 2016 presidential election. Before that, Ben covered business news at CNNMoney and AdAge, and all manner of stories in and around New York. He still loves appearing on the New York news radio he grew up with.

Enterprise

Microsoft and Google are still using emotion AI, but with limits

Microsoft said accessibility goals overrode problems with emotion recognition and Google offers off-the-shelf emotion recognition technology amid growing concern over the controversial AI.

Emotion recognition is a well-established field of computer vision research; however, AI-based technologies used in an attempt to assess people’s emotional states have moved beyond the research phase.

Photo: Microsoft

Microsoft said last month it would no longer provide general use of an AI-based cloud software feature used to infer people’s emotions. However, despite its own admission that emotion recognition technology creates “risks,” it turns out the company will retain its emotion recognition capability in an app used by people with vision loss.

In fact, amid growing concerns over development and use of controversial emotion recognition in everyday software, both Microsoft and Google continue to incorporate the AI-based features in their products.

“The Seeing AI person channel enables you to recognize people and to get a description of them, including an estimate of their age and also their emotion,” said Saqib Shaikh, a software engineering manager and project lead for Seeing AI at Microsoft who helped build the app, in a tutorial about the product in a 2017 Microsoft video.

Keep Reading Show less
Kate Kaye

Kate Kaye is an award-winning multimedia reporter digging deep and telling print, digital and audio stories. She covers AI and data for Protocol. Her reporting on AI and tech ethics issues has been published in OneZero, Fast Company, MIT Technology Review, CityLab, Ad Age and Digiday and heard on NPR. Kate is the creator of RedTailMedia.org and is the author of "Campaign '08: A Turning Point for Digital Media," a book about how the 2008 presidential campaigns used digital media and data.

Latest Stories
Bulletins