BUY NOW, PAY LATER PRODUCTS

WHITE PAPER

Iris Ikeda, Commissioner of Financial Institutions

Hawaiʻi Division of Financial Institutions

Department of Commerce and Consumer Affairs

Krystal Piceno, Researcher

pay interest for the remainder of the payments. Consumers received the products

immediately without paying for the item(s) in full. It was an attractive option at the

internet checkout, and had the potential to impact consumers to accumulate short-term

debt.

This paper explores the history of “buy now, pay later” and the impacts and allure

of this product for Gen Z and millennials. An analysis of the various concerns by

regulators including accumulation of consumer debt, inadequate or insufficient

disclosures, targeting customers, antitrust and consumer privacy is discussed. The

paper also explores the impact on state laws and Hawaiʻi law to protect unsuspecting

consumers from the accumulation of debt.

I. INTRODUCTION

Popular “buy now, pay later” (“BNPL”) companies such as Affirm, Afterpay,

Klarna, Paypal, and Zip are partnered with various retailers to allow consumers an

alternative way to purchase their products.

method that provides the consumer the ability to make purchases and repay in the

makes money by charging the merchants both a fixed fee for the transaction and a

variable fee based on several factors, including method of payment chosen by the

customer. Payment approval relies on a soft credit check and is based on credit history,

age, salary, etc.”

Consumers are using BNPL to purchase items ranging from the

occasional big-ticket items to everyday household items.

Since the COVID-19 pandemic, BNPL has increased making deferring and

splitting payments more popular. Because of its quick rise and ongoing popularity,

regulators are concerned with its negative implications. Some concerns include

; Consumer Financial Protection Bureau,

Consumer Financial Protection Bureau Opens Inquiry into “Buy Now, Pay Later” Credit, CONSUMER

/about-

us/newsroom/consumer-financial-protection-bureau-opens-inquiry-into-buy-now-pay-later-credit/.

2

Consumer Financial Protection Bureau, Consumer Financial Protection Bureau Opens Inquiry into “Buy Now,

https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-opens-inquiry-into-

buy-now-pay-later-credit/.

Bureau (CFPB) opened an inquiry into the BNPL industry.

Recently, on September 15,

2022, the CFPB released a report (“CFPB Report”) detailing BNPL and its impact to

consumers.

6

The CFPB Report raised similar issues discussed in this paper.

II. BACKGROUND

A. WHAT IS BUY NOT PAY LATER PRODUCT?

payment option, especially when shopping online.

This can also be a longer-term product that can charge interest and up to a term

of 36 months. The BNPL may charge convenience fees to consumers, charge late

fees, but typically make their money by charging merchant fees. During the pandemic,

BNPL flourished in the sales of electronics, health care and fashion. As the nation

emerged from the pandemic, buying airline tickets with BNPL made it possible for

families to visit one another. Consumers see the BNPL option at the online check out,

where they have the option of paying in full with a credit card or paying with a BNPL

5

Consumer Financial Protection Bureau, Consumer Financial Protection Bureau Opens Inquiry into “Buy Now,

buy-now-pay-later-credit/.

6

Consumer Financial Protection Bureau, Buy Now, Pay Later: Market trends and consumer impacts, Consumer

Financial Protection Bureau (Sep. 2022),

company. Most recently, as consumers are using BNPL, they are being marketed

directly via social media.

Home remodel

Travel

Custom furniture

Social networking

Payment apps

This is not a new business model. Consumers have seen this type of product in

slightly different deferred payment models.

A. HISTORY OF DEFERRED PAYMENTS AND ITS COMPARISON TO BNPL

PRODUCTS

Deferred payment methods dated back to the 1920s during the Great

consumers could receive the item.

Credit cards provided a line of credit that allowed

consumers to purchase items and to pay off the loan in the future plus interest.

9

During the Great Depression, consumers had insufficient cash to purchase

household goods, so retailers allowed consumers to purchase items such as

In the twenty-first

payment (at least 20%), and it helps consumers purchase expensive household items

while allowing them to budget and save.

BNPL, is that layaway requires a consumer to pay the item in full before receiving it.

Additionally, layaway allows the retailer to refund consumer’s money if they canceled

(less a cancellation fee). Similarly,BNPL is a consumer credit product that finances the

transaction, but in contrast to layaway, it allows consumers to receive goods

immediately when a consumer agrees to make a down payment and repay in three

more payments. Receiving a refund from a BNPL can be more challenging due to the

9

U.S. Bank, How Credit Cards Work, U.S. BANK (last viewed Aug. 15, 2022), https://www.usbank.com/credit-

cards/how-credit-cards-work.html.

https://www.newyorker.com/magazine/2012/01/02/delayed-gratification

term layaway as “[a] method of buying goods by having the seller, usu. for a deposit, keep the goods until the full

price can be paid by a predetermined date.” LAYAWAY, Black's Law Dictionary (11th ed. 2019).

Now, Pay Later” Credit, CONSUMER FINANCIAL PROTECTION BUREAU (Dec. 16, 2021),

Another popular deferred payment method is payday lending. Payday lending is

typically a short-term, high-cost loan, typically due the next payday. These loans are

usually repaid in full with interest as a single payment on the borrower’s next payday or

when income is received from another source. To repay the loan, the borrower writes a

post-dated check for the full balance, including fees or provides the lender with an

from the structure of the payday loan to “rollover or “renew” causing the interest rate on

the short-term loan to multiply. Hawaiʻi repealed the deferred check law with the

enactment of Act 56 (SLH2021).

B. THE RISE IN BNPL

gratification; (ii) budgeting; and (iii) it is an alternative to credit cards.

2022), https://news.bloomberglaw.com/banking-law/buy-now-pay-later-industry-is-about-to-meet-its-first-big-test

Compared to the former layaway option where customers were required to pay the item in full before receiving it.

27, 2022),

https://news.bloomberglaw.com/banking-law/buy-now-pay-later-industry-is-about-to-meet-its-first-big-

retailers are also driving the use of BNPL.

collaborated with BNPL service provider Affirm, Inc. This partnership enabled

customers to use the service via the Amazon portal when they check out.”

According to Fortune Business Insights, since 2018, the BNPL industry has

grown by 300% and, in 2021, was valued at nearly $16 billion.

adoption across millennials in developed countries, have propelled the

increased by 300% in the U.S. since 2018, with 45 million users in 2021,

Further, several e-commerce companies across retail, banking and

healthcare insurance sectors are adopting these services to facilitate their

customers around the globe. Also, leading players in the market are

A wide range of products are eligible for BNPL credit, which is generally available

when a consumer checks out online or in a mobile app. If approved, the product is sent

to the consumer and the consumer pays for the product in four fixed payments with no

interest or finance charges.

.

Amazon, Inc., being one of the leading retailers, helped Affirm gain significant revenue.

Moreover, the revenue of the leading players has been increased during post pandemic which

resulted in the rise in demand for services. For instance, in the last quarter of 2020, Affirm Holdings,

Inc. recorded USD 2.70 billion revenue which was 55% additional as compared to 2019. This is

resulted in high demand for the services.

Due to this rise in BNPL users in the United States and its increase in demand,

regulators have grown concerned with the debt accumulation by consumers.

BNPL’s

rise in demand from consumers can be explained by the impact of the pandemic.

“[D]uring the pandemic, consumers' online shopping preferences have been increased

worldwide. The pandemic has shifted the customers towards online e-commerce

was the leading country accounting for 30% of global sales in the BNPL market.

Detailed below is the increase in demand for BNPL products and services which can be

explained by consumer behavior in the lens of behavioral economics and trends in

consumer preferences.

https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-opens-inquiry-into-

buy-now-pay-later-credit/. More on BNPL concerns in section III(A) of this paper.

YAHOO! (June 15, 2022), https://www.yahoo.com/now/buy-now-pay-later-market-131500648.html

new report published by Precedence Research, the global buy now pay later market is registering growth at a CAGR

of around 43.8% from 2022 to 2030. In 2021, North America dominated the market, accounting for over 30% of

worldwide sales.” Id.

tool, allowing them to purchase items that they do not have full payment at the time of

the purchase.

Generally, consumers are happy to use BNPL products to defer payments and

immediately receive their purchases.

BNPL companies often express that their

products are a helpful budgeting tool for consumers to create “financial freedom.”

for both online and in-store purchases.”

BNPL appears to be a helpful budgeting tool for consumers. Almost all

consumers can qualify for BNPL credit if they meet minimum requirements.

However, it

is easy for consumers to overextend their finances when consumers use several BNPL

vendors. Generally, consumers can only have one BNPL plan with a vendor until it is

paid off. But consumers can buy products from several BNPL vendors which can add

up and exceed the ability for a consumer to repay.

the purchase is for groceries, big-ticket items, or utility bills, credit cards are a useful

YAHOO! (June 15, 2022), https://www.yahoo.com/now/buy-now-pay-later-market-131500648.html

https://corporate.afterpay.com/our-story

.

later/?_gl=1*bshh0*_ga*MTEyNjAwNjM3Mi4xNjYxNDY2ODUy*_ga_DBYJL30CHS*MTY2MTQ2Njg1Mi4xL

Experian’s one-of-a-kind specialty bureau will provide real-time reporting of

regulated scores and attributes that BNPL providers and traditional lenders

complete view of consumers’ BNPL repayment behaviors, lenders can

provide thin-file or subprime consumers who would otherwise be denied

credit with first or second chances.

In other words, lenders now have access to view consumers spending with BNPL

According to the CFPB report, when consumers need help with a return or refund, the

process may take longer than the BNPL installment plan and there is an uncertainty of

who should be responsible.

The return process may be complicated when the merchant declines to

contact the BNPL lender to file a dispute, either via the lender’s app or by

investigation and contacts both the borrower and merchant. Once the

may issue a refund or credit. However, with the short-term, six-week nature

the loan term. In these instances, the borrower may be required to make

https://www.businesswire.com/news/home/20220127005299/en/Experian’s-Industry-first-Buy-Now-Pay-Later-

Bureau-Will-Protect-Consumer-Credit-Scores-and-Provide-Real-time-Insights-to-Drive-More-Inclusive-and-

Responsible-Lending.

affect-credit-score.

Financial Protection Bureau (Sep. 2022),

As a result, consumers are left paying the BNPL lender while attempting to contact the

merchant or retailer.

“frictionless.”

Finally, lawmakers are most concerned about the regulatory arbitrage.

was created to protect consumers from predatory loan practices.

lenders to provide complete disclosure of the terms in loan agreements.

It is of

particular significance that TILA is only applied to loan installment payments of five or

more.

Here, the regulatory arbitrage utilized by BNPL is able to avoid TILA, because

the industry typically operates by pay-in-four installment plans.

The resulting lack in

Moreover, antitrust concerns arise from data harvesting and monetization due to

BNPL companies “shifting their business models toward propriety app usage.”

The

harm in data harvesting and monetization may lead to a decrease in consumer privacy,

strengthening large tech companies’ market power, and reduce competition and

innovation.

Recently Apple announced that their Apple Pay users can make four equal

payments over six weeks at no extra cost. Apple is not using a bank partner, instead it

the terms of the agreement of the loan violated TILA.

2022), https://news.bloomberglaw.com/banking-law/buy-now-pay-later-industry-is-about-to-meet-its-first-big-test

.

Consumer Finance Protection Bureau (Sep. 15, 2022),

study-details-the-rapid-growth-of-buy-now-pay-later-lending/.

is using its consumers Apple ID history.

Apple has access to a lot of its customer data

through Apple Pay, potentially giving itself an unfair advantage over other BNPL

companies. Other online shops (Amazon, Meta) and payment processors (Google Pay,

Paypal) may also be using its customer data, possibly in violation of privacy laws.

In 2001, the Colorado Supreme Court in State v. The Cash Now Store, Inc.

Consumer Credit Code (UCCC) § 5-1-102 concerning retail installment sales and states

Service, https://www.forbes.com/sites/ronshevlin/2022/07/27/cfpb-accuses-apple-of-misusing-consumer-data-with-

some suppliers of consumer credit.”

“loan” to include transactions that require “an unconditional obligation to repay,” which is

not explicitly stated in the statute.

Further, when a creditor advances money to

someone it creates debt.

also be extended to cover BNPL products. As mentioned above, BNPL products are

subject to the UCCC and TILA, the courts could possibly expand its meaning to cover

BNPL in order to accomplish its purpose––consumer protection.

Effective 2006, Ohio implemented the Retail Installment Sales Act (RISA). RISA

defines “retail installment sales” to include

[E]very retail installment contract to sell specific goods,

in installments over a period of time, and every retail sale of specific goods

period of time.

Unlike TILA, this statute opens the door to BNPL products due to its broad language

improvement services; automobiles; mobile homes; furniture; cemetery burial plots and

swimming pools. Additional installment sales also may apply.”

Therefore, the

language concerning “installments over a period of time” could possibly cover BNPL

pay-in-four installment method.

In 2020, California was one of the first states that specifically dealt with BNPL.

consumers.” California defines “consumer loan” as “a loan, whether secured by either

real or personal property, or both, or unsecured, the proceeds of which are intended by

the borrower for use primarily for personal, family, or household purposes.”

In

California, lenders need a loan license. Afterpay was operating and doing business in

California without a loan license.

The CDFPI entered a Consent Order with Afterpay:

After an inquiry, the Commissioner determined that Afterpay had engaged

in violation of Financial Code section 22100, subdivision (a) by making

(Transactions). Afterpay neither admits nor denies that it has engaged in

https://www.ohioattorneygeneral.gov/Business/Services-for-Business/Business-Guide/Retail-Installment-Sales

Pay Later Plans, THE PEW CHARITIBLE TRUST (Feb. 2, 2022),

https://www.pewtrusts.org/en/research-and-

analysis/blogs/stateline/2022/02/02/regulators-scrutinize-buy-now-pay-later-plans.

By classifying Afterpay as a lender, they are subject to loan regulations under California

law. Therefore, furthering the citizens of California protection against regulatory

arbitrage and predatory lending. CDFPI’s decision was based on California’s Financial

Code section 22100, subdivision (a), stating “(a) No person shall engage in the

business of a finance lender or broker without obtaining a license from the