MD should help protect buy now, pay later consumers

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If you have bought something online in the last year or two, you have probably seen the option to pay in four installments at no extra cost. Buy now, pay later (BNPL), they call it. It sounds like a great deal, and for some consumers it is. Consumers get the products they want and pay BNPL companies for them over time, often six weeks. But for others, it can create significant problems.

BNPL providers pay sellers something less than the full price of the item, even less than credit card companies pay merchants. Sellers are willing to accept that lower price because consumers use BNPL to buy more than they otherwise would, enabling merchants to make up in volume for the reduced profit margin.

So everyone is happy? Not so fast.

Some consumers, enticed by BNPL, become overcommitted and can’t meet their financial obligations. You might think BNPL providers would suffer when consumers are in that situation, but the BNPL companies have found a clever way to shift losses due to customer overextension to someone else.

BNPL providers typically require borrowers to set up automatic payments from bank accounts. The result is that the consumer’s BNPL payment empties out the account after which the consumer defaults on another obligation. Consequently, BNPL customers are five times as likely to default on credit card obligations as on BNPL loans. Because the BNPL companies usually don’t bear the risk of customer default, they can afford to be more cavalier about screening borrowers and often make only a soft pull of credit reports.

Because of this market failure, BNPL providers still make money when they extend credit to consumers who can’t meet their financial obligations. One study found that nearly half of BNPL customers regretted using it for a purchase.

You might think that federal law, which regulates mortgages, credit cards, auto loans, student loans, and many other consumer financial transactions, would address these problems. But no: the BNPL providers have deliberately set up their transactions to avoid federal government regulation. The federal Truth in Lending Act’s requirements are triggered when a lender provides for five payments, but BNPL usually requires only four. While the Biden-era Consumer Financial Protection Bureau issued an interpretive rule providing for some consumer protections for BNPL customers, the Trump administration swiftly rescinded it and has essentially sought to rescind the CFPB itself.

That means it’s up to states, like Maryland, to protect consumers when it comes to BNPL. And given that about half of BNPL borrowers have had issues with BNPL transactions, consumers need some protections. On the other hand, some consumers like BNPL transactions, so it would be a mistake simply to outlaw them. The goal, then, is to provide some needed protections while still enabling consumers who benefit from BNPL to use it.

One such protection should be to require BNPL providers to verify that their customers can repay the transaction, just as is required of credit card and mortgage issuers. But Maryland should also provide that BNPL providers need not verify the consumer’s ability to pay for BNPL loans for amounts under $200, with inflation adjustments, because loans for smaller amounts are less likely to trigger defaults.

Maryland should also oblige BNPL providers to report BNPL transactions to credit bureaus so that lenders, including BNPL providers, can more accurately assess the risk of lending to consumers. At present, some BNPL providers do not report to credit bureaus. As a result, credit card lenders, for example, cannot tell if a consumer has become overextended on BNPL loans and so a default may be in the offing.

Maryland should also impose some other credit-card-like protections on BNPL providers. Specifically, Maryland should require BNPL providers to disclose clearly to consumers what they are obliged to pay, including possible late fees. Many BNPL borrowers are confused about what they will have to pay and when. And Maryland should provide BNPL protections against billing errors and unauthorized charges.

With proper protections, BNPL can be a boon to Maryland’s consumers and businesses. It’s up to the legislature to provide them.

Editorial Advisory Board Members James B. Astrachan, Gary E. Bair, Arthur F. Fergenson, Ericka N. King, Debra G. Schubert and H. Mark Stichel did not participate in this opinion.

EDITORIAL ADVISORY BOARD MEMBERS

James B. Astrachan, Chair

James K. Archibald

Gary E. Bair

Arthur F. Fergenson

Nancy Forster

Susan Francis

Julie C. Janofsky

Ericka N. King

George Liebmann

George Nilson

Steven I. Platt

Angela W. Russell

Debra G. Schubert

Jeff Sovern

H. Mark Stichel

The Daily Record Editorial Advisory Board is composed of members of the legal profession who serve voluntarily and are independent of The Daily Record. Through their ongoing exchange of views, members of the board attempt to develop consensus on issues of importance to the bench, bar and public. When their minds meet, unsigned opinions will result. When they differ, or if a conflict exists, majority views and the names of members who do not participate will appear. Members of the community are invited to contribute letters to the editor and/or columns about opinions expressed by the Editorial Advisory Board.