Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.
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November 28, 2022
What's Had Your Attention in 2022?
For many people, Wordle is one of the more entertaining things to emerge over the last year and its once-daily word limit drives anticipation for players worldwide. Recently, Wordle inspired the British-English Cambridge Dictionary's word of the year—homer—which stumped many international players not familiar with the baseball term. We haven't seen any payments words make their way into Wordle—yet—but a few words in the payments lexicon have attracted our interest this year, some of which have been featured in our weekly blogs. In our upcoming annual, year-end webinar, members of the Retail Payments Risk Forum will share and debate their picks for payments word of the year and the key issues that make it relevant for 2022.
Please join us on December 15 from 1 to 2 p.m. (ET) for our next Talk About Payments episode, when Atlanta Fed payments experts will talk about what's new and noteworthy in payments during 2022 and identify trends, opportunities, and challenges for 2023 and beyond.
Among the topics up for discussion:
- continuing evolution of the payments infrastructure
- trends and challenges with business payments
- opportunities to band together to fight fraud
And, of course, the payments word of the year. Bring your questions and take part in the conversation!
The webinar is free and open to the public. However, you must register. Once registered, you will receive a confirmation email with the login information. If you cannot attend the live event, a recording of the webinar will be posted before the end of the year.
If you'd like to view previous webinars, go to our Talk About Payments webinars page.
We hope to see you on December 15!
November 7, 2022
More Highlights from the CFPB BNPL Report
My October 3 post on the Consumer Financial Protection Bureau's (CFPB) 2022 report on the buy now, pay later (BNPL) industry highlighted some of the key metrics from the CFPB's data collection efforts of the five major BNPL operators in the United States. In this post, I review some of the benefits, concerns, and planned actions identified in the report.
The report acknowledges several financial benefits of the "pay-in-four" BNPL loans to the consumer—primarily that they don't charge interest, which makes them an attractive alternative to other forms of credit. For example, the report cites data from a 2021 report on the consumer credit card market : the cost of credit in 2020 for revolving cardholders using general purpose cards was 17.7 percent.
The main sales pitch that BNPL firms present to the merchant is that BNPL increases the potential for incremental sales; with this option, the customers may purchase a more expensive product or additional products. While the CFPB report does not have any specific metrics on incremental sales, it does cite a number of claims from the BNPL firms about how BNPL could increase average sales amounts and attract new customers. The report mentions another benefit for merchants: the BNPL firm providing the credit assumes all the risk of nonpayment. As I mentioned in my earlier post, the firms reported that 3.8 percent of loans were charged off in 2021—up from 2.9 percent in 2020.
Any extension of credit risks consumers assuming more debt than they can afford. In particular, the report cites "loan stacking" as a possible danger. Loan stacking occurs when the customer obtains multiple BNPL loans from different lenders, "stacking up" the payment obligations of each loan on top of one another. BNPL firms try to minimize this danger by limiting initial loan amounts. However, since most BNPL providers don't report loan activity to the major credit reporting agencies, they can't know how many BNPL loans the consumer may have gotten from other BNPL firms and, therefore, they have no knowledge of the consumer's full debt. This concern is increased by the trend shown in the data that the repeated use of BNPL has increased over the last three years. In the fourth quarter of 2021, the five lenders surveyed reported an average usage rate per unique customer of 2.8 loans used during the quarter. This figure only reflects the number of loans with a particular lender. In the first quarter of 2019, this average was 1.9 loans.
Besides the risk of credit overextension, the report details other potential harms, including:
- a lack of clear and consistent disclosures
- inconsistent practices regarding merchandise disputes
- mounting late fees and bank fees for multiple representments of returned payments
- the requirement to use autopay or the difficulty in selecting another payment method
- the use of customer data for purposes other than handling the transaction
The next question is this: With this data in hand, what does the CFPB plan to do about rules or guidance for the BNPL industry? In a prepared statement issued in conjunction with the report's release, CFPB director Rohit Chopra outlined several actions the organization would take immediately, including continually monitoring the BNPL industry. The CFPB staff will identify potential guidance or rules that will require the same consumer disclosures and protection that credit cards are subject to. The CFPB will continue to encourage the development of processes for BNPL firms to work with the credit reporting agencies so that loan experiences are reported regularly and accurately and a consistent methodology is used to estimate the debt burden of a household.
The execution of supervisory examinations has been inconsistent due to the variety of the business structures of the BNPL firms. The CFPB is encouraging voluntary examinations but is also looking into its authority to mandate examinations. Related to consumer data protection and privacy, the CFPB plans to work with the Federal Trade Commission on developing rules that will be applicable to all businesses regarding using data for something other than the BNPL transaction itself.
While the BNPL industry is in its early stages, it is becoming a major part of the retail credit landscape. We will continue to follow and report on developments in this industry.
October 24, 2022
What the Payment Choice Act Means for Cash
Since the first paper bills emerged in the United States in 1690, cash has been a payment choice for governments, merchants, and consumers in our nation.
The pandemic, though, changed things for cash users. Notices appeared at merchant locations like coffee shops, restaurants, and other retail sites throughout the country: "Credit or Debit Card Only" or "We are going cashless!" Merchants may choose not to accept cash for a variety of reasons, including hygiene concerns, banking office closures or reduced hours that often made it harder to get cash for the till, and coin supply issues that made it hard to make change even when cash was accepted. Surprisingly, even as the pandemic's influence is lifting, some merchants still refuse to accept cash.
However, that may change with the Payment Choice Act of 2021 (H.R.4395), introduced on July 9, 2021, and sponsored by Rep. Donald M. Payne Jr. (D-New Jersey). The proposed legislation is designed "to prohibit retail businesses from refusing cash payments, and for other purposes." The bill passed in the house twice: first on June 21, 2022, as an amendment to the Financial Services Racial Equity, Inclusion and Economic Justice Act, and on July 14, 2022, as an amendment to the National Defense Authorization Act. The bill would need to be passed by the Senate to be enacted and we will keep an eye on its progress. A similar bill, Cash Always Should Be Honored, was introduced in 2019 by Rep. David Cicilline (D-Rhode Island), who was concerned that cashless businesses discriminate against customers who do not have access to a credit card. The bill did not move forward but the PCA captures the original intention.
Key points in the Payment Choice Act include:
- Requires retail businesses—those that sell or offer goods or services at retail to the public and accept in-person payments at a physical location—to accept cash as a form of payment for sales in amounts less than $2,000
- Prohibits them from charging cash-paying customers a higher price compared to customers not paying with cash
- Provides for enforcement through preventative relief and civil penalties
Our work in payments inclusion informs us that cash is a primary payment choice for about 7.1 million US households (5.4 percent) that choose not to use banks. These rates are highest among low-income, Black, Hispanic, Native Americans, and people with disabilities. When cash is not accepted, it can create a barrier that excludes primary cash users from the payments system and from getting needed goods and services. This can create hardship for people and may also result in loss of business for merchants.
But isn't cash acceptance a requirement? The answer is no. While cash is US legal tender, merchants don't have to accept it. According to the Board of Governors of the Federal Reserve System, "there is no federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services."
Some states and cities (New Jersey, Colorado, Washington, DC, New York City, Philadelphia, and San Francisco) have enacted similar merchant cash acceptance policies. Other states, like Georgia, have bills pending. These legislative actions create a mandate for businesses that may override their choice to not accept cash as a payment option while protecting consumers' preferences to use cash. What do you think?
October 3, 2022
CFPB Releases Report on Buy Now, Pay Later
In 2021, the five major firms offering buy now, pay later (BNPL) loans originated approximately 180 million loans, with a total value of $24.2 billion and an average value of $135. That's according to a long-awaited report on the US BNPL industry from the Consumer Financial Protection Bureau (CFPB). This report resulted from an increasing number of consumer complaints about BNPL, primarily about fee disclosures and problems with merchandise returns, and requests from some congressional figures. (Read my August 1, 2022, post on BNPL for a refresher on what led to the report.)
The full report provides detailed information about the state of the BNPL industry in the United States over the 2019–21 period. Here are some other findings in the report that I found interesting:
- While the apparel and beauty sectors still dominate the markets that BNPL lenders serve, their share dropped from 80 percent in 2019 to 59 percent in 2021. Personal effects—which include electronics, fitness and sporting equipment, games and hobbies, and jewelry—made up the second largest segment, at 11 percent of the market.
- From an underwriting standpoint, 73 percent of the BNPL offers in 2021 were approved, with a charge-off rate of 3.8 percent, up from 2.9 percent in 2020.
- By the end of 2021, three of the five lenders were imposing late payment fees, which were in the $7 to $8 range. A fourth lender had charged late fees for most of 2021 but discontinued them in the fourth quarter. For the three firms still charging late fees at the end of the year, about 12 percent of borrowers incurred at least one late fee in 2021, and 7 percent of loans incurred at least one late fee.
- Late fees represented on average 0.28 percent of the BNPL firms' gross merchandise sales.
- As the chart shows, debit card dominates the payment methods, while check, at less than one-tenth of 1 percent, is the least frequent choice.
- In 2021, only 60 percent of the dollar value of the merchandise value returned or disputed was refunded, up from 45 percent in 2019. This has been a major source of customer complaints.
- Discount fees paid by merchants have dropped steadily since 2019 as additional BNPL firms have entered the market. In 2019, the average discount fee was 3.39 percent. It was 2.91 percent in 2020 and 2.49 percent in 2021.
We will report on the business trends cited in the report as well as the CFPB's planned next steps in our next post on this subject.
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