How Regulators Around The World Aim To Curb Buy Now / Pay Later Payments Source
The rapid growth of the buy now / pay later market is drawing the attention of financial services regulators concerned about the lack of specific rules for point-of-sale credit and the potential risk to consumers.
This week audience The House Financial Services Committee’s task force is the latest in a series of steps taken by banking regulators in countries around the world to understand BNPL’s impact on consumer debt and how the product should be governed.
The political attention comes amid a rapid expansion of BNPL loans. The product is expected to grow from a market of $ 60 billion per quarter in 2019 to $ 166 billion per quarter in 2023, according to RBC Capital Markets. Other estimates assess the growth potential of the BNPL market. Bank of America, for example, expects BNPL’s global market spend $ 1 trillion in the next four years.
The appeal to investors and financial institutions is clear. BNPL increases conversion rates between 20% and 30% and increases average ticket sales between 30% and 50%, according to RBC Capital Markets.
The incursion of fintechs like Affirm, Klarna and Afterpay has been accompanied by competitive movements of Goldman Sachs, Square, Capital One Financial Corporation, and the investments and partnerships of the major American card brands.
Fintech investors are also investing funds in BNPL companies, anticipating further increases given BNPL’s popularity with young consumers and the product’s still relatively low penetration. While BNPL’s payments have doubled globally in the past two years, the product still accounts for around 2% of the global e-commerce market, according to WorldPay.
But there is also research that suggests BNPL poses a risk to consumers. australia Treasury Department found that 30% of BNPL’s income comes from “bad debt,” which she defines as debt used for consumption rather than wealth creation. And taking into account late fees for BNPL loans, the APR for BNPL can be as high as 68%, according to the Australian Treasury.
A report from Australian Parliament found that BNPL financing is a factor in one in five consumer bankruptcies, compared to 3% for credit cards. In the United States, about two-thirds of BNPL users have a credit card balance equal to or greater than 75% of their limit on their first BNPL purchase, according to Research and markets. Other data from Motley Fool’s research arm found that 40% of consumers take a BNPL loan to buy items they can’t afford while avoiding credit card debt.
It is this risk that worries regulators. The following are examples of new regulations or government agencies planning or considering new rules for BNPL.