Whether it’s buying a pack, a mattress or even booking a vacation, the rise of the “buy now, pay later” industry has made it easier and faster to engage in major online purchases. , often by clicking a few buttons. BNPL has caught the eye of major fintechs and secured large sums of venture capital funding, but consumer advocates have warned of the risk that customers have overdrawn their accounts, drawing increasing scrutiny scrutiny from US regulators.

According to analysis by Morning Consult, there is actually a substantial overlap between people who receive overdraft fees and those who use “buy now, pay later” products. Databased on a survey of 2,200 adults from January 28-30.

And in January, overdrafts were more than twice as likely as all American adults to have been users of BNPL services.

Although it is unclear whether this relationship is causal or whether the two groups are simply drawing from the same group of people, the correlation between overdrafts and BNPL users is statistically significant at a 95% confidence interval, according to a logistic regression analysis performed by Morning Consult, even controlling for race, income, gender, community, and generational demographics.

Consumer advocates have said the relationship between BNPL users and overdrafts is concerning. Lauren Saunders, associate director at the National Consumer Law Center, who also testified in Congress about the BNPL industry, called the data “discouraging but not surprising.”

“People who don’t have the money to pay something in full today and people who have an overdraft are drawn to ‘buy now, pay later’ because it feels like a more affordable form of credit than ‘it actually isn’t,’ she said.

The Financial Technology Association, a trade group that represents many of the BNPL’s businesses, disputed the conclusions of Morning Consult’s analysis, saying the data “wrongly equates the BNPL with a pervasive problem”.

“When used responsibly, ‘buy now, pay later’ is an alternative to high-cost traditional credit, which often comes with double-digit APRs and expensive fees,” said Penny Lee, general manager of the commercial group which is testified before the House Financial Services Committee Task Force on FinTech on the benefits and risks of the sector.

In the survey question, Morning Consult defined BNPL as “a short-term loan option that allows customers to make purchases at retailers without having to pay the full amount upfront”, and given Afterpay, Klarna, Sezzle, Affirm and QuadPay as examples; the latter two are not members of the Financial Technology Association.

A trade group official said its BNPL member companies “conduct soft credit checks to assess the probability of repayment” and do not “grant access to their product in the event of insufficient funds and cut off access. in the event of non-payment”.

The official also noted that most customers of its member companies use debit cards and customers can avoid overdraft fees if they do not opt ​​for overdraft protection services. And several of the trading group’s member companies do not authorize the capabilities of the Automated Clearinghouse Network, the service that electronically transfers funds between banks by direct deposit, direct payment or electronic checks, which the official says is “another deterrent against overdrafts”.

With usage peaking in December, “buy now, pay later” is under regulatory scrutiny

Since the BNPL exploded amid the COVID-19 pandemic – as consumers retreated to their homes and began to increasingly shop online – the Consumer Financial Protection Bureau has begun to take a look. criticism of the sector.

Federal regulators are watching the BNPL sector closely during the holiday shopping season as customers increasingly fund freebies with alternative payment methods and short-term loans. BNPL usage peaked in December, with 23% of all US adults reporting having used the service, according to monthly surveys dating back to August 2021.

CFPB Director Rohit Chopra reported heightened surveillance of the sector during a Washington Post Live Event earlier this month, when he predicted that the last holiday season would “break records in terms of immediate purchase, subsequent adoption”.

“Part of what we need to do is make sure we monitor these markets because we have seen time and time again – and the American public has seen it time and time again – law enforcement agencies and regulators just asleep at the switch, not understanding how markets work, and then being too late when things go wrong,” he said.

The relationship between the overdraft and the BNPL is central to some of the CFPB’s concerns about the sector. The agency warned that the loans can incur overdraft fees if customers do not have enough money in their accounts to make payments. (The CFPB declined to comment for this story).

Bryan Schneider, former associate director of supervision, enforcement and fair lending at CFPB from 2019 to 2021, said the relationship between overdraft and BNPL usage is something “regulators should think about” , although he said people shouldn’t assume that BNPL “must be a bad product” because of the correlation.

“That would be just too narrow of a consumer financial life focus,” said Schneider, now a partner at the Chicago law firm Manatt, Phelps & Phillips.

Another concern of consumer advocates and the CFPB is about missed payments and fees that can pile up if customers make them frequently, further exacerbating the overdraft problem. Unlike more traditional short-term credit, such as making a purchase with a credit card, BNPL companies do not perform an “ability to pay” analysis as required by the Truth in Lending Act, which , according to some consumer advocates, makes them more likely to lend to people who cannot afford to pay their loans.

According to the Morning Consult survey, 20% of BNPL users missed a payment in January.

Young adults and minorities are more likely than other demographic groups to use BNPL

Because BNPL is sometimes used as an alternative to traditional credit cards, customers may find themselves in situations where they automatically pay into a single debit account for multiple retail purchases, which can spiral out of control and result in charges. discovered, Taylor Roberson said. , Federal Policy Advisor at the Center for Responsible Lending.

“When you have consumers who use it as an alternative to credit, customers make the bank account the primary resource for repaying loans,” she said. “When there are potentially many loans from many companies in trouble, that’s the kind of situation where the likelihood of overdrafts increases.”

Although a review of the data shows that overdrafts are much more likely to use BNPL than U.S. adults as a whole, it’s unclear if these loans are driving these overdrafts, Roberson and d other consumer advocates.

Users of BNPL products tend to be younger people and minorities, according to Morning Consult data – the same groups most likely to have an overdraft.

The higher share of minorities and young people using BNPL is always something the CFPB will take into account as it weighs oversight, said Michael Taiano, senior director at Fitch Ratings who has written about the BNPL sector and its regulatory outlook.

“If I were a regulator, I would be concerned that certain demographics would be exploited in one form or another,” he said.

Morning Consult data scientist Chris Cyr contributed.