It’s a scene any frequent online shopper would recognize.
Maybe you’re buying some luggage, a coat or some tools. You go to pay, and there’s a spot to enter your credit card information. But just beneath that is a second option: Maybe you’d prefer splitting it up into interest-free payment installments?
Those pay-every-two-week microloans — known as ‘Buy Now, Pay Later’ and offered by companies like Affirm, Zip and Klarna — are enormously popular with shoppers, who can benefit from spreading out their payments at no extra cost. But they’ve operated with limited regulation, drawing concern from state and federal regulators that there aren’t enough consumer protections in place, leaving people at risk of ballooning debt.
A new proposal in Gov. Kathy Hochul’s $233 billion state budget proposal would change that in New York.
For the first time, Hochul wants to order Buy Now, Pay Later lenders to obtain a license to operate in the Empire State — a move that would allow the state to limit late fees, force companies to report to credit bureaus and implement other fraud protections, much like those already required in the credit card industry.
The proposal comes as federal regulators have yet to implement rules and guidelines of their own, despite examining the industry and raising concerns about potential risks over the last two years. If state lawmakers approve — and so far, they appear receptive to the plan — New York would join California in requiring the companies to have a license to operate.
“When we see something like this and there is little to no regulation, the state has to step up,” said state Sen. Kevin Thomas, a Long Island Democrat who chairs the consumer protection committee. “That’s exactly what the governor is doing right now, and I applaud her for that.”
The Buy Now, Pay Later industry has exploded in popularity in recent years, increasing from 16.8 million loans worth $2 billion in 2019, to a whopping 180 million loans worth $24.2 billion in 2021, according to a 2022 report from the U.S. Consumer Financial Protection Bureau.
That’s partly due to the boom in online shopping during the early days of the COVID-19 pandemic, according to Ed deHaan, a professor at the Stanford Graduate School of Business who has studied the burgeoning industry’s effects.
Now, nearly every major retailer has partnered with a company or companies on Buy Now, Pay Later, or BNPL, products — online and, in some cases, even in stores.
“The main thing at the end of the day is just the competitive effects,” deHaan said. “If Walmart — just to throw out some names — starts accepting BNPL, then Target has to do so as well, because we see that BNPL is a favored product and consumers will change their behaviors to shop at places that offer it.”
It works like this: The lender partners with a retailer to offer the loan, which is usually structured in four equal payments due over six weeks. The buyer gets the product when they make their initial payment upon checkout, and then is on the hook for three more payments, which are generally offered without interest.
Unlike normal loans, which rely on interest, the lender makes money by charging a fee to the merchant, usually between 2% and 8% of the purchase price, according to the CFPB. Late fees run around $7 or $8 a payment, though some companies don’t charge late fees at all.
Under Hochul’s proposal, the state Department of Financial Services — which oversees banks in the state — would be tasked with regulating Buy Now, Pay Later companies that loan to New Yorkers. The agency would be required to come up with rules to prohibit “abusive and excessive” late fees, require the lenders to clearly lay out their terms and report their loans to the credit-reporting agencies.
But the governor’s proposal could set up a potential lobbying battle in Albany as she and state lawmakers negotiate a spending plan over the next two months. A final budget is due March 31, though the governor and lawmakers have blown that deadline in recent years.
So far, the major Buy Now, Pay Later companies are taking a cautious approach.
Penny Lee, president of the Financial Technology Association, says consumers like having the option to split their payments, interest-free. Her organization — which represents Klarna, Zip, PayPal and Afterpay — commissioned a poll showing 79% of consumers who used BNPL had a positive experience.
“We look forward to working with regulators and elected leaders to balance consumer protection with innovation so that people can continue to use the financial tools they depend on,” Lee said in a statement.
In a separate statement, Matt Gross, a spokesperson for Affirm, said the company makes “consistent and transparent disclosures” about its terms to consumers at checkout, doesn’t charge late fees and assesses each transaction for risk. He said the company has “long been vocal in our support of efforts that promote greater choice and transparency for consumers, including thoughtful regulation.”
The company also says it is open to changes to credit reporting to “account for BNPL.”
But Gross also noted: “We are subject to extensive regulation and oversight, both directly and indirectly, by way of our partnership with our originating bank partners, under federal law and the laws of the states and provinces in which we operate.”
DeHaan said the extent to which Buy Now, Pay Later companies are voluntarily offering consumer protections is “debatable.” But he said requiring them to report to credit agencies is key.
Without that, consumers can find themselves susceptible to what’s known as “debt stacking” — maxing out one line of credit and turning to other lines of credit before paying off the first. If the BNPL loans are reported, then lenders can use that information to determine whether someone should be offered a loan.
DeHaan’s research has shown Buy Now, Pay Later users tend to experience more bank overdraft fees and credit card interest and fees than non-users. His 2022 research paper, authored with three other professors, is titled: “Buy Now Pay (Pain?) Later.”
“I would want to sort of dig into exactly what regulations that New York is going to introduce, but if it’s ones that are sort of the basic protections that we already see for credit cards, I think this is a great thing,” deHaan said.
The state Legislature will begin holding public hearings on Hochul’s budget proposal next week.
Assemblymember Nily Rozic, a Queens Democrat who chairs her chamber’s consumer protection committee, said she agrees with Hochul that the state should step in.
“These are financing products that are not covered by federal laws or regulation,” she said. “So there’s tremendous potential for states to intervene.”
