Well-established companies such as The Goldman Sachs Group Inc. and Mastercard Inc. are diving headlong into a financial technology product that some critics fear poses risks to consumers.
The service, known as “buy now, pay later,” or BNPL for short, is a twist on the old-fashioned layaway plans once offered by retailers. The difference is that consumers get their goods right away, and many of the plans may come from their financial companies, not the sellers.
Mastercard said last month that it’s launching a service that will provide customers with a flexible way to pay online or in store through interest-free installments. The “Mastercard Installments” BNPL program will be offered in the U.S., U.K. and Australia.
PayPal Holdings Inc. acquired Japanese startup Paidy Inc. last month for $2.7 billion to deepen its BNPL offerings. Goldman Sachs and Apple are partnering to launch a BNPL service called Apple Pay Later.
The payment model has grown in popularity in the United States since the onset of the COVID-19 pandemic, allowing consumers to divide their purchases into several smaller — usually four — interest-free payments, which are made biweekly or monthly until the balance is paid in full. Most charge late fees for missing payments.
Experts say the rapid expansion is sure to draw the attention of regulators.
“The BNPL space is growing fast. When it comes to credit, consumers gravitate to options that make their choices easy and the processes simple, and BNPL does both,” said Jo Ann Barefoot, a former deputy comptroller of the currency and Senate Banking Committee staff member who now leads the Alliance for Innovative Regulation in Washington. “Those very traits, however, raise concerns among advocates and regulators, so regulatory focus is growing commensurately with the growth of these products.”
Some of the regulatory reaction so far includes the Consumer Financial Protection Bureau in June advising consumers of the benefits and pitfalls, and the U.K.’s Financial Conduct Authority’s announcement that it will oversee the BNPL industry.
Ted Rossman, a financial analyst at Bankrate.com and CreditCards.com, said BNPL is popular because the fixed installments “provide a light at the end of the tunnel” that both feels better to consumers and can save them money compared with a credit card purchase — especially if they’re only making minimum payments on the latter at an average 16 percent interest rate.
Another benefit, according to the CFPB, is that approval for a BNPL service, which can be done during an online checkout or through a mobile app, will take only a few minutes and generally doesn’t involve a “hard credit inquiry.”