House hearing (117th Congress), BUY NOW, PAY MORE LATER? INVESTIGATING RISKS AND BENEFITS OF BNPL AND OTHER EMERGING FINTECH CASH FLOW PRODUCTS (PDF)
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The printed record of a November 2, 2021 hybrid hearing of the Task Force on Financial Technology of the House Committee on Financial Services, Serial No. 117–58, titled Buy Now, Pay More Later? Investigating Risks and Benefits of BNPL and Other Emerging Fintech Cash Flow Products. It lists the full committee under Chairwoman Maxine Waters. Witnesses are Kristen E. Broady of the Brookings Institution, Penny Lee of the Financial Technology Association, Lauren Saunders of the National Consumer Law Center, Brian Tate of the Innovative Payments Association and Marisabel Torres of the Center for Responsible Lending. The appendix holds prepared statements and additional material, including written statements of Earnin and Gusto.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
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BUY NOW, PAY MORE LATER? INVESTIGATING
RISKS AND BENEFITS OF BNPL AND OTHER
EMERGING FINTECH CASH FLOW PRODUCTS
HYBRID HEARING
BEFORE THE
TASK FORCE ON FINANCIAL TECHNOLOGY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
NOVEMBER 2, 2021
Printed for the use of the Committee on Financial Services
Serial No. 117–58
(
U.S. GOVERNMENT PUBLISHING OFFICE
46–247 PDF WASHINGTON : 2022
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK MCHENRY, North Carolina,
NYDIA M. VELÁZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York PETE SESSIONS, Texas
DAVID SCOTT, Georgia BILL POSEY, Florida
AL GREEN, Texas BLAINE LUETKEMEYER, Missouri
EMANUEL CLEAVER, Missouri BILL HUIZENGA, Michigan
ED PERLMUTTER, Colorado ANN WAGNER, Missouri
JIM A. HIMES, Connecticut ANDY BARR, Kentucky
BILL FOSTER, Illinois ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio FRENCH HILL, Arkansas
JUAN VARGAS, California TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas BARRY LOUDERMILK, Georgia
AL LAWSON, Florida ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam WARREN DAVIDSON, Ohio
CINDY AXNE, Iowa TED BUDD, North Carolina
SEAN CASTEN, Illinois DAVID KUSTOFF, Tennessee
AYANNA PRESSLEY, Massachusetts TREY HOLLINGSWORTH, Indiana
RITCHIE TORRES, New York ANTHONY GONZALEZ, Ohio
STEPHEN F. LYNCH, Massachusetts JOHN ROSE, Tennessee
ALMA ADAMS, North Carolina BRYAN STEIL, Wisconsin
RASHIDA TLAIB, Michigan LANCE GOODEN, Texas
MADELEINE DEAN, Pennsylvania WILLIAM TIMMONS, South Carolina
ALEXANDRIA OCASIO-CORTEZ, New York VAN TAYLOR, Texas
JESÚS ‘‘CHUY’’ GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
CHARLA OUERTATANI, Staff Director
(II)
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TASK FORCE ON FINANCIAL TECHNOLOGY
STEPHEN F. LYNCH, Massachusetts, Chairman
JIM A. HIMES, Connecticut WARREN DAVIDSON, Ohio, Ranking
JOSH GOTTHEIMER, New Jersey Member
AL LAWSON, Florida PETE SESSIONS, Texas
MICHAEL SAN NICOLAS, Guam BLAINE LUETKEMEYER, Missouri
RITCHIE TORRES, New York TOM EMMER, Minnesota
NIKEMA WILLIAMS, Georgia BRYAN STEIL, Wisconsin
(III)
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CONTENTS
Page
Hearing held on:
November 2, 2021 ............................................................................................. 1
Appendix:
November 2, 2021 ............................................................................................. 31
WITNESSES
TUESDAY, NOVEMBER 2, 2021
Broady, Kristen E., Fellow, Metropolitan Policy Program, The Brookings In-
stitution ................................................................................................................. 5
Lee, Penny, CEO, Financial Technology Association (FTA) ................................. 6
Saunders, Lauren, Associate Director, National Consumer Law Center
(NCLC) .................................................................................................................. 8
Tate, Brian, President and CEO, Innovative Payments Association (IPA) ........ 11
Torres, Marisabel, Director, California Policy, Center for Responsible Lending
(CRL) ..................................................................................................................... 9
APPENDIX
Prepared statements:
Broady, Kristen E. ............................................................................................ 32
Lee, Penny ......................................................................................................... 40
Saunders, Lauren ............................................................................................. 45
Tate, Brian ........................................................................................................ 65
Torres, Marisabel .............................................................................................. 69
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
Lynch, Hon. Stephen F.:
Written statement of Earnin ........................................................................... 84
Written statement of Gusto ............................................................................. 97
McHenry, Hon. Patrick:
Written statement of the CATO Institute ...................................................... 100
Written statement of the Electronic Transactions Association .................... 105
Williams, Hon. Nikema:
Written responses to questions for the record from Lauren Saunders ........ 107
Written responses to questions for the record from Marisabel Torres ........ 109
(V)
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BUY NOW, PAY MORE LATER?
INVESTIGATING RISKS AND
BENEFITS OF BNPL AND
OTHER EMERGING FINTECH
CASH FLOW PRODUCTS
Tuesday, November 2, 2021
U.S. HOUSE OF REPRESENTATIVES,
TASK FORCE ON FINANCIAL TECHNOLOGY,
COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
The task force met, pursuant to notice, at 10 a.m., in Room 2128,
Rayburn House Office Building, Hon. Stephen F. Lynch [chairman
of the task force] presiding.
Members present: Representatives Lynch, Torres; Davidson, Ses-
sions, Luetkemeyer, Emmer, and Steil.
Ex officio present: Representative Waters.
Chairman LYNCH. Good morning, everyone. The Task Force on
Financial Technology will come to order. Without objection, the
Chair is authorized to declare a recess of the task force at any
time. Also, without objection, members of the full Financial Serv-
ices Committee who are not members of the task force are author-
ized to participate in today’s hearing.
Today’s hearing is entitled, ‘‘Buy Now, Pay More Later? Inves-
tigating Risks and Benefits of BNPL and Other Emerging Fintech
Cash Flow Products.’’
I now recognize myself for 4 minutes to give an opening state-
ment.
In the last few years, a number of emerging fintech liquidity
products have garnered increased attention for both their explosive
growth among merchants and their popularity among consumers,
as well as the potential for consumer protection risks. Products
such as buy now, pay later (BNPL), earned wage access, and over-
draft avoidance are designed to help consumers manage their cash
flow at lower cost than many traditional alternatives.
A recent study by McKinsey reports that buy now, pay later
fintechs have diverted between $8 billion to $10 billion in revenue
from traditional banks. Indeed, it is difficult to shop online without
seeing a buy now, pay later option, and Early Pay has become a
popular benefit for both employers and employees.
However, these products also raise important questions about the
use of consumer data, the exploitation around spending patterns,
the application of lending laws, and the potential for unsustainable
levels of consumer debt.
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2
Point of sale, or buy now, pay later providers typically partner
with merchants and offer consumers the opportunity to purchase a
product and pay over time through installments. These products
are most commonly offered on retail, fashion, electronics, beauty,
and travel websites. Users of buy now, pay later products tend to
be younger consumer cohorts who have a limited or a thin credit
history and do not qualify for traditional credit. Both the numbers
of merchants offering these services and the customer base has
grown exponentially during this pandemic.
While companies and proponents argue that these products can
be beneficial because they allow consumers flexibility and are
cheaper alternatives to credit cards, consumer advocates and re-
search groups have raised concerns over the risk of consumers
overextending their finances and taking on unsustainable levels of
debt, noting that most buy now, pay later companies do not assess
ability to repay. Additionally, most BNPL companies do not report
buy now, pay later transaction histories to credit bureaus, which
would be a missed opportunity to help consumers build credit-
worthiness.
The lack of consumer disclosure has also raised concerns. The
Pay in 4 business model, which typically offers customers the op-
tion of 4 installments in 2-week intervals at zero-percent interest,
has been criticized by some for being specifically designed to evade
lending regulations such as the Truth in Lending Act. Earned wage
access companies typically partner with an employer or a payroll
company to offer consumers advances on earned wages prior to
payday. Providers recoup advances directly from subsequent em-
ployee paychecks. Similar direct-to-consumer overdraft avoidance
companies establish direct connections with consumers’ bank ac-
counts to monitor cash flow. Companies then offer consumers ad-
vances based on those cash flow patterns and recoup advanced
funds from account balances.
Overdraft avoidance companies can monetize this service through
membership fees, interchange fees, or directly through employers.
Other overdraft avoidance companies monetize through so-called
voluntary tips. These products have become popular with hourly
workers who live paycheck to paycheck because they offer addi-
tional liquidity between paydays. Critics of this service argue that
the products should be regulated as loans and be subject to lending
laws, including an APR requirement. Consumer advocates have
been particularly critical of the tipping model, and question wheth-
er a tip influences a consumer’s likelihood of being offered an ad-
vance.
The emergence of these products raises larger questions about
consumer cash flow needs. Policymakers have taken some actions
in response to these questions. The California Department of Fi-
nancial Protection and Innovation took action against several buy
now, pay later companies and issued a legal opinion classifying
these products as loans. The Consumer Financial Protection Bu-
reau (CFPB) also released a blog post encouraging consumers to be
keenly aware of the details of these products before choosing them.
Additionally, the New York State Department of Financial Services
led a multi-State investigation of a number of earned wage access
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3
and overdraft avoidance companies to determine whether they had
violated State lending laws.
Today, we have a distinguished panel of witnesses who will be
able to discuss these issues more deeply. Throughout this hearing,
I hope to dive deeper into these products and explore the merits
and risks that they raise and the true nature of these products and
the implications for borrowers engaging in unsustainable borrowing
patterns.
With that, I would like to recognize my friend, the ranking mem-
ber of the task force, Mr. Davidson, for 5 minutes for his opening
statement.
Mr. DAVIDSON. Thank you, Chairman Lynch, and thanks for our
witnesses and the work that you have done in advance to make
sure we have a great discussion today. We are talking about buy
now, pay later, but frankly, this is just the whole concept of credit.
Fintech didn’t create the concept of credit, but the focus will, of
course, be on what has changed in light of this fintech innovation.
What is innovative going on in the marketplace?
The exceptional growth and popularity of programs such as buy
now, pay later, earned wage access, and overdraft avoidance prod-
ucts exemplifies some of the benefits that fintech has brought to
consumers in recent years, and today’s hearing will assist this task
force in understanding just how and why these products are becom-
ing preferred over traditional financial products that also extend
credit. Until we gather a sound understanding of these products
and how they are used, we should refrain from implementing over-
ly burdensome regulations that would overly impede consumers
from receiving the benefits that the programs bring.
It is important to recognize just how far these products, or really
access to credit, has evolved over the past several years. According
to a Forbes article from last month, the percentage of Gen Z’ers in
the U.S. using buy now, pay later, for instance, has grown sixfold,
from 6 percent in 2019, to 36 percent in 2021. Millennials’ use of
buy now, pay later has more than doubled. Meanwhile, Gen X’ers’
adoption has more than tripled.
Additionally, according to a Mercator study in 2020, we already
have millions of workers using earned wage access programs. It is
estimated that the total addressable market is around 45 million
workers, with many of these individuals working in the gig econ-
omy. I would note that often it seems the employers are the ones
extending credit to the employees as they have actually worked the
hours.
Lastly, in the midst of the pandemic, we saw many banks mi-
grate away from overdraft fees and adopt overdraft avoidance tools,
such as up-to-the-minute notifications and grace periods to repay
a negative balance. With these developments in mind, we cannot
deny that there is a strong market demand for the products. Con-
sumers are undoubtedly deriving more benefits from the financial
services industry than they were just a few years ago. The access
to short-term liquidity is easier now more than ever thanks to tech-
nology and advancement, with more ways to access credit.
Which demographics are more inclined to use these products? Do
these products help to address the unbanked or underbanked? How
are these products affecting small businesses in our macro econ-
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4
omy? I am confident that this hearing can provide clarity on some
of these issues, given the range of witnesses that we have here
today, but it is important to note that we must exercise caution be-
fore we take regulatory action against products, and some products
we may need to overly protect.
The exponential growth of these alternative financial products
clearly shows that consumers want them, so we should avoid doing
two things. We should avoid punishing new products for not fitting
within regulatory buckets that were already built, and we should
clarify how they would fit into to this current regulatory scheme.
We should avoid overly impairing consumer choices on how they
spend money, and we should facilitate innovation. Does this mean
that I am advocating for a completely hands-off approach? Cer-
tainly not. As I say often, I am a Republican, not an anarchist. But
if there is a harm that the products impose on consumers, then
hopefully this hearing can weigh out the problem and help us find
a way to solve it.
Proactively legislating or promulgating rules always runs the
risk of failing to adequately address the problem. In fact, many
times it addresses a problem that isn’t there. Conversely, failing to
address known problems really puts a heavy burden on our regu-
lators, and often see we regulation by enforcement in the market
which punishes innovation and fails to protect consumers.
Lastly, I would just reiterate the importance of protecting con-
sumer data as we continue to adopt these new financial tech-
nologies. As many probably remember, consumer data privacy was
the prime focus of our task force’s last hearing. I encourage my col-
leagues to always keep that in mind any time we are discussing
new financial products where consumers are providing sensitive in-
formation. I am sure we will continue to discuss these topics fur-
ther within the committee as alternative financial products become
more widely adopted and innovation continues to flourish here in
America. This hearing will hopefully serve as groundwork for fu-
ture hearings, and I look forward to the discussion with our wit-
nesses on the range of issues.
Chairman LYNCH. The gentleman yields back.
Today, the ranking member and I welcome the testimony of our
distinguished witnesses: Dr. Kristen Broady, a fellow at the Metro-
politan Policy Program at the Brookings Institution; Ms. Penny
Lee, the CEO of the Financial Technology Association; Ms. Lauren
Saunders, the associate director of the National Consumer Law
Center; Ms. Marisabel Torres, the director of California policy with
the Center for Responsible Lending, who is joining us virtually;
and Mr. Brian Tate, CEO and president of the Innovative Pay-
ments Association.
The witnesses are reminded that their oral testimony will be lim-
ited to 5 minutes. You should be able to see a timer on the screen,
or on the desk in front of you, that will indicate how much time
you have left. I would ask you to be mindful of the timer so that
we can be respectful of both the witnesses’ and the taks force mem-
bers’ time.
And without objection, your written statements will be made a
part of the record.
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Dr. Broady, you are now recognized to offer a 5-minute presen-
tation of your testimony. Thank you.
STATEMENT OF KRISTEN E. BROADY, FELLOW, METROPOLI-
TAN POLICY PROGRAM, THE BROOKINGS INSTITUTION
Ms. BROADY. Good morning, Chairman Lynch, and members of
the Task Force on Financial Technology. My name is Kristen
Broady, and I am a fellow in the Brookings Metropolitan Policy
Program. Thank you for the opportunity to appear before you to
discuss consumer lending products offered by our technology-fo-
cused fintech companies.
Financial technology companies can mitigate racial, financial,
health, and wealth gaps that hamper Black and Hispanic families’
financial security through product offerings and policies they put in
place. Through technology and automation, they can reduce costs
and prices, speed up delivery, and increase convenience for under-
served populations. Over the past 20 years, fintech companies have
provided new ways to capture data, reach broader audiences, and
expand access to credit. These companies also have the potential to
think differently about policies and programming that can amplify
opportunities for Black and other minority communities. These pri-
vate-sector innovations can be paired with public policy interven-
tions as well as address some of the systemic issues that have con-
tributed to the financial health and wealth gap.
Fintech companies can create inclusive financial services prod-
ucts for people who are credit invisible or low-credit individuals.
For example, fintech companies can smooth and stabilize cash flow
by collaborating with enterprise. Financially vulnerable popu-
lations experience greater income and expense volatility. Offering
accounts that do not have overdraft fees, minimum balance re-
quirements, and account maintenance fees can help reduce the neg-
ative impacts of this volatility.
It can provide interest-free, buy now, pay later capabilities so
that consumers can comfortably make purchases and spread out
payments as they get paid. Klarna’s buy now, pay later option is
an example of this. It allows customers to split the cost of their
purchase into four smaller payments without paying any interest
or impacting their credit score. This allow consumers the ability to
try items before they pay for them and only pay for items that they
keep.
Further, with respect to saving and investing, fintech companies
can help Americans build emergency savings. According to an
AARP national survey of U.S. adults aged 30 and older, 3 in 5 Afri-
can Americans experienced an unexpected financial challenge in
the past year. A study by the Economics Policy Institute (EPI)
found that in 2016, half of families had no retirement savings at
all and that disparities existed by race. Two-thirds, or 68 percent,
of White, non-Hispanic families have retirement savings, compared
to 41 percent of Black families and 35 percent of Hispanic families.
To increase the saving ability of Black and Hispanic families,
fintech companies can offer high-yield savings accounts, automated
savings features, and robo- and micro-investing tools to increase
savings opportunities.
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They can use alternative data and machine learning to extend af-
fordable credit to a larger population of consumers. They can pro-
vide fast, fair, and flexible small business lending products that do
not require a personal credit score. We know that Black and His-
panic people are likely to have lower credit scores traditionally
than White people, which means that these companies are helping
them to build savings and buy products that they need. They can
focus on access to capital through a racial equity lens.
In addition to being deliberate in how small business credit prod-
ucts meet the needs of Black-owned small businesses, it can cap-
italize on opportunities to work with government stakeholders and
provide a fintech perspective so that as laws and regulations are
updated, they reflect the changing landscape of financial services.
Fintech companies can offer products that bridge the gap between
cash and traditional financial services that empower people to par-
ticipate in the digital economy. They can hire more people of color,
particularly Black people, as we see banks leaving Black neighbor-
hoods and Black people having less access to traditional banking
products.
They can meet people where they are in their communities work-
ing more intentionally with local leaders, minority depository insti-
tutions (MDIs), and community development financial institutions
(CDFIs). They can partner with banks that are focused on racial
equity at a time that we see racial equity disappearing from the
banking industry. They can engage with people of color in their
communities, in churches, in sororities, and work with Historically
Black Colleges and Universities (HBCUs) and minority-serving in-
stitutions to increase financial literacy so that these underserved
populations have a better idea of what their products are and what
they have to offer. With respect to public policy, they can take
steps to increase financial health by increasing investments in
CDFIs. They can create mandatory financial curriculum for middle
and high schoolers to help educate people earlier.
Thank you.
[The prepared statement of Dr. Broady can be found on page 32
of the appendix.]
Chairman LYNCH. Thank you. Ms. Lee, you are recognized for 5
minutes to offer a summation of your testimony.
STATEMENT OF PENNY LEE, CEO, FINANCIAL TECHNOLOGY
ASSOCIATION (FTA)
Ms. LEE. Thank you, Chairman Lynch, Ranking Member David-
son, and members of the Task Force on Financial Technology for
the opportunity to testify before you today on innovations in finan-
cial services that are empowering consumers and businesses with
greater choice, opportunity, and access. My name is Penny Lee, and
I am the chief executive officer of the Financial Technology Associa-
tion (FTA), a nonprofit trade association representing some of the
world’s leading technology-centered financial services. We educate
consumers, regulators, policymakers such as yourselves, and third-
party industry stakeholders on the value of trusted digital financial
services, and advocate for the modernization of financial regulation
to support innovation and promote inclusion.
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7
We are in a transitional time when technology allows financial
services to be more accessible and to facilitate faster and easier
transactions. Consumers and businesses are shifting to modern
tech-driven solutions to manage their payments, facilitate trans-
actions, secure a loan, track expenses, and access capital. If anyone
had a meal, medicine, or groceries delivered during the pandemic,
that likely took place over financial technology, a fintech platform.
By using internet and mobile platforms, machine learning automa-
tion, and other emerging technologies, fintech companies are pro-
viding consumers with improved personalized services, greater con-
venience, increased transparency, reduced costs, and broader access
to capital for individuals and businesses.
These advances are coming at a critical time for the American
economy. Millions remain underbanked and underserved and lack
access to fair credit. Student debt continues to mount, income and
wealth inequality continues to grow, and small businesses seek to
rebuild from the devastation caused by the COVID-19 pandemic.
Fortunately, fintech solutions offer a new paradigm and are re-
shaping the financial landscape in powerful ways.
I will focus my remarks today on a particular area of the fintech
innovation, which is called buy now, pay later (BNPL). FTA is
pleased to count many of the global leaders in BNPL as founding
members of the organization.
There is a shift in how consumers, especially Millennials, Gen Z,
and others, are spending their money. They are saving more and
utilizing credit cards less, preferring debit cards with no fees or re-
volving interest. Buy now, pay later is an alternative payment
method that allows for small, short-term purchases that are typi-
cally paid in interest-free installments. BNPL products are struc-
tured to have payment terms that require consumers to pay for a
purchase in a matter of weeks or a few months. This is in contrast
to revolving credit and high-interest products that may take years
to pay down, blur the true cost of a purchase, and oftentimes keep
consumers in vicious debt due to continuous interest charges and
rollovers.
BNPL products are preferred by consumers for several reasons.
One, they charge little or no interest fees, unlike credit cards which
can sometimes cost consumers up to 225 percent of their product
purchase value in interest expenses. They are transparent and pro-
vide greater cost certainty for consumers. They help users budget
and, as a result, help manage cash flow better and avoid risky debt
products. They are flexible and offer more relief when consumers
face an unexpected emergency. And they typically result in less
debt, and repayment takes place over much shorter terms.
BNPL products are regulated. They are subject to key consumer
protection laws and regulations, including anti-money laundering,
fair lending, credit reporting, debt collection, privacy, fair treat-
ment of customers, and electronic fund transfers. They are also
subject to similar State consumer protection laws.
Our members are committed to regulatory frameworks that safe-
guard consumers, and are actively engaged with financial regu-
lators, such as the CFPB, in this pursuit. FTA appreciates the op-
portunity to engage with the committee today and use this as just
the start of an ongoing dialogue. Fintech innovation, including
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8
BNPL solutions, is driving competition and choice for consumers
that result in lower costs and better financial outcomes. We believe
strongly that balance and thoughtful regulation is key to long-term
success for all involved stakeholders, including providers, con-
sumers, and merchants utilizing new payment systems.
We look forward to helping inform this important process. Thank
you.
[The prepared statement of Ms. Lee can be found on page 40 of
the appendix.]
Chairman LYNCH. Thank you, Ms. Lee.
Ms. Saunders, you are now recognized for 5 minutes to give an
oral presentation of your testimony.
STATEMENT OF LAUREN SAUNDERS, ASSOCIATE DIRECTOR,
NATIONAL CONSUMER LAW CENTER (NCLC)
Ms. SAUNDERS. Thank you. Chairman Lynch, Ranking Member
Davidson, and members of the task force, thank you for inviting me
to testify. I am here today on behalf of the low-income clients of
the National Consumer Law Center, which works for economic jus-
tice for low-income and vulnerable consumers.
We are seeing an explosion of products that claim to help people
manage gaps between income and expenses. Some, if well-designed,
can help meet consumers’ needs, but some are designed to evade
consumer protection laws or fall outside of critical consumer protec-
tion laws. Funding or liquidity provided today, that is repaid today,
is credit. Even if clothed in shiny fintech garb, new credit products
need basic consumer protections for credit to ensure that it is af-
fordable, responsible, transparent, and fair.
Buy now, pay later products may help consumers manage larger
purchases without the long-term debt and high cost of credit cards.
When they operate as promoted, they can be a win-win, but mul-
tiple loans can be difficult to manage and could lead to
unaffordable debt loads. Abusive profit models may be built on late
fees from struggling consumers. Refunds may be difficult to obtain
if there is a problem with the item or service financed.
Earned wage access products are a form of payday loans—funds
advanced ahead of payday and repaid on payday—even if they are
generally lower cost and less dangerous than traditional payday
loans. Most employees re-borrow every pay period and fees can add
up and increase with charges for instant access. In the end, low-
wage workers may simply be paying to be paid. The trend for em-
ployers and payroll providers to offer free early pay and free early
wage access repaid through payroll, if used occasionally, may help
manage cash flow, but more study is needed.
One of the more deceptive and invasive forms of credit I have
seen is the use of reportedly voluntary tips. The tips model is
spreading and is used in fake earned wage access apps like Earnin,
which have no connection to employers; supposedly overdraft fee-
free forms of overdraft credit on non-banked deposit accounts, like
Chime; cash advance features on other non-banking apps, like
MoneyLion and Dave; and platforms, like SoLo Funds, that purport
to be mere arrangers of peer-to-peer loans.
Tips are a disguised form of interest. Companies have ways of
pushing people into tipping. Access may be restricted. Default tips
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9
may be difficult to undo. When caught using one method of press-
ing tips, another will surface. All the tip products I just listed are
balloon payment loans that undoubtedly lead to a cycle of re-bor-
rowing. Just like the $15 charge on a conventional $100 payday
loan, tips on fintech payday loans may seem small, but they can
add up to high-dollar amounts and high APRs that can reach 200
percent or higher.
Notably, products that claim not to be credit may also deny being
subject to the Equal Credit Opportunity Act. As we reckon with
systemic racism and the impact of new technologies, we must not
countenance evasions of fair lending laws. We must also keep a
close eye on how products evolve. as products may not stay free or
low cost, or the ultimate business model may be different than it
appears.
My recommendations are that financing and liquidity products
are and should be subject to Federal and State lending laws. Regu-
lators should closely examine and crack down on evasive pricing
models. All forms of credit should be based on ability to repay, and
those that are not may be unfair, deceptive, or abusive. Point of
sale credit should have the same chargeback rates, reasonable pen-
alty fees, ability to repay, and statements like credit cards have.
The CFPB should begin examining providers of fintech products,
and regulators should look out for inappropriate use of consumers’
data and for disparate impacts.
Thank you for inviting me to testify. I look forward to your ques-
tions.
[The prepared statement of Ms. Saunders can be found on page
45 of the appendix.]
Chairman LYNCH. Thank you, Ms. Saunders.
Ms. Torres, you are now recognized for 5 minutes for a presen-
tation of your testimony.
STATEMENT OF MARISABEL TORRES, DIRECTOR, CALIFORNIA
POLICY, CENTER FOR RESPONSIBLE LENDING (CRL)
Ms. TORRES. Thank you. Good morning, Chairman Lynch, Rank-
ing Member Davidson, members of the task force, and members of
the committee. My name is Marisabel Torres, and I am the director
of California policy at the Center for Responsible Lending. Thank
you for the opportunity to testify in today’s hearing.
As a Latina who is first generation, my immigrant parents did
not come to this country equipped with knowledge of the U.S. fi-
nancial system. I have seen firsthand how easily people can be
preyed upon with credit offers that may promise financial oppor-
tunity but that can result in financial harm. As a consumer advo-
cate who has worked on policy issues around financial inclusion, in-
cluding predatory inclusion, I know that my family’s experience
was not unique.
Our discussion today is timely. The availability of fintech prod-
ucts and services is increasing as many consumers face tightened
household budgets and heightened financial insecurity in the wake
of a health crisis with dire economic consequences. More consumers
may be looking for financial help after forbearance periods expire
and stimulus payments have ended. Lenders who offer seemingly
low cost or even free credit are well-positioned to capture this mar-
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10
ket share, but while these products may appear straightforward,
consumers and policymakers must ask themselves, what is the
catch? We need data to understand what they are, their preva-
lence, and whether further protections are needed. The testimony
I have submitted for the record details our concerns with products,
including buy now, pay later, earned wage access, and so-called
overdraft avoidance products. My oral testimony will focus on buy
now, pay later.
In my State of California, the previous commissioner of our fi-
nancial regulator, the Department of Financial Protection and In-
novation (DFPI), discovered that by offering these products to Cali-
fornia consumers, certain buy now, pay later providers were mak-
ing them illegally, without a license to make loans in this State.
On this basis, DFPI brought enforcement actions against them and
required their licensing in California. Because they were then li-
censed, DFPI was able to begin gathering data. We are awaiting
public disclosure of key points, but, at a minimum, we know that
the take up of these products has exploded in California. Of the
loans that DFPI has published data on, the top six buy now, pay
later lenders accounted for nearly 11 million, or 91 percent, of the
total consumer loans originated in 2020. If there are problems,
their impact will be felt on a wide scale.
As described by recent surveys of buy now, pay later users, there
are a number of issues identified with the surge in this lending.
More providers are entering this market, and we cannot delay their
examination to fully understand the impact on consumers. There
are signs that borrowers who miss payments may be racking up
late fees at a high rate. A Credit Karma study found that of the
1,000 users surveyed, one-third reported they had fallen behind in
all payments. Of those people, over half said their credit scores had
declined thereafter. Not all of the buy now, pay later providers will
pull credit to determine a consumer’s ability to pay, but those that
do will also report missed payments through a credit bureau, so
these products can lead to damaged credit.
As with payday loans, buy now, pay later requires the user to
give lenders access to a bank account or a credit card to withdraw
payment. This can lead to problems such as overdrafts, not having
sufficient funds to cover the payment, and the inability to pay
other bills. These products are also targeting and attracting young-
er consumers. As we saw with credit cards being pushed on college
campuses, this can saddle young people with debt, starting their
journey into adulthood with damaged credit and the potential for
lifelong negative financial consequences. There is also concern that
the entire business model of buy now, pay later rests on driving
borrowers to purchase items they would not otherwise buy.
Finally, these products are algorithmically-driven. We can as-
sume that they will be subject to inevitable algorithmic bias. It is,
therefore, vital that they be subject to regulatory examination to
see if there are fair lending and related concerns. This all rein-
forces the need for the Consumer Financial Protection Bureau
(CFPB) to use its authority to identify and address the risk that
they pose to consumers. The CFPB should collect data and move
towards supervision of these products.
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Thank you again for letting me be part of this discussion. I look
forward to your questions.
[The prepared statement of Ms. Torres can be found on page 69
of the appendix.]
Chairman LYNCH. Thank you, Ms. Torres.
Mr. Tate, you are now recognized to present a 5-minute summa-
tion of your testimony.
STATEMENT OF BRIAN TATE, PRESIDENT AND CEO,
INNOVATIVE PAYMENTS ASSOCIATION (IPA)
Mr. TATE. Chairman Lynch, Ranking Member Davidson, and
members of the Task Force on Financial Technology, my name is
Brian Tate, and I am the president and CEO of the Innovative
Payments Association (IPA). It is my privilege to appear before you
today to share the IPA’s views on emerging fintech cash flow prod-
ucts, with specific emphasis on the use of earned wage access. IPA
is a non-profit trade association that serves as the leading voice of
the electronic payment sector, including prepaid products, mobile
wallets, and peer to peer (P2P) payments. IPA’s mission is to en-
courage efficient use of electronic payments, cultivate financial in-
clusion, and empower consumers.
As we have learned through the pandemic, even the best-laid
plans cannot always protect families from unexpected financial dis-
ruptions. The Federal Reserve’s 2018 survey of household econom-
ics found that 40 percent of American households would struggle
to come up with $400 to pay for an unexpected bill. Many con-
sumers have few options should they face an unexpected expense
between paydays, and the traditional options have proven to be ex-
pensive. The U.S. Department of Labor reports that nearly two-
thirds of U.S. businesses pay their workers on a biweekly, semi-
monthly, or monthly schedule, which means that workers are, in
essence, giving their employers an interest-free loan. A study by
the Financial Health Network found that 38 percent of respondents
reported timing mismatches between wage income and expenses.
During the past 10 years, the payment innovators have devel-
oped new services and products to help consumers meet these tim-
ing mismatches. One of the most practical and affordable options
is earned wage access, or EWA. Simply put, EWA programs allow
consumers to access their own money prior to payday. Getting paid
daily is not a new concept. Many Americans, including wait staff,
taxi drivers, and bartenders, can get paid at the close of their
shifts. The two former leaders of the Consumer Financial Protec-
tion Bureau, Directors Cordray and Kraninger, didn’t agree on
much, but both took concrete steps to support EWA. Director
Cordray exempted employer-sponsored programs from his 2017
payday lending rule, and Director Kraninger issued an advisory
opinion explaining that certain EWA programs are simply not cred-
it. IPA agrees with both Cordray and Kraninger and maintains
that EWA products are not loans or credit products. Therefore,
they should not be subject to the Truth in Lending Act (TILA).
The Financial Health Network’s report on EWA found that con-
sumers in financial distress may consider title, payday, or pawn
loans as options. With the average cost per EWA transaction rang-
ing from $2.59 to $6.27, the report makes it clear that EWA is far
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less costly than other options. EWA has grown in popularity be-
cause it is safer, cheaper, and a more efficient alternative to other
short-term products on the market. EWA providers do not impact
customers’ credit ratings, and they do not share information to
credit reporting bureaus. EWA is offered with no recourse and pro-
viders have no rights against the user in the event of non-payment,
loss of employment, closed accounts, or blocked payments. These
are non-recourse transactions, which means the risk of loss is on
the provider.
As someone who has been working since the age of 14, I can eas-
ily relate to a retail worker, single parent, or young adult facing
a financial emergency and lacking easy access to short-term liquid-
ity. At different points in my life, I have walked in the same shoes
as millions of Americans who find themselves unable to pay for a
utility bill, childcare, or an unexpected medical expense. Treating
EWA as credit would be a mistake and would remove a valuable
tool from a consumer’s financial toolkit.
Thank you for the opportunity to present the views of the IPA,
and I welcome any questions the task force may have.
[The prepared statement of Mr. Tate can be found on page 65 of
the appendix.]
Chairman LYNCH. Thank you, Mr. Tate.
I will now recognize myself for 5 minutes of questions.
This is an interesting dilemma, because often on this committee,
the full committee, especially Chairwoman Waters and the ranking
member, often talk about banking the unbanked or underbanked.
So, here we have a suite of services or products that, you have to
admit, seem to be going not entirely at the cohort that we are in-
terested in, but they are going at younger consumers who have a
thin credit file or no credit history at all. So, they are sort of going
at the problem, but yet in many respects, and I know this has been
brought up by Ms. Torres, and Ms. Broady, and Ms. Saunders, that
the buy now, pay later providers don’t necessarily share the credit
transactions or the credit history with credit rating agencies. And
so, we don’t have all the data that we would desire. And ironically,
data flows so seamlessly in this industry. It is ironic that the only
data that is not flowing is the flowing to the credit agencies that
might actually help some of these consumers with thin credit files.
But what are we seeing out there? I know that a number of you
had testified about the situation in Australia, where I assume that
the adoption rate is a little bit more robust than it is here in the
United States. I think they got an earlier start because of some of
their regulatory framework. But what are we seeing right now in
terms of defaults, late fees, late payment penalties? What are we
seeing in this space, especially compared to, I guess, the more oner-
ous payday lending products that are out there or high-interest-
rate credit cards? Ms. Broady, do you have any data on that?
Ms. BROADY. I do not.
Chairman LYNCH. Okay. Ms. Saunders?
Ms. SAUNDERS. I set this out in my testimony. One survey done
for Credit Karma found that 34 percent of people who had tried a
buy now, pay later loan had fallen behind on one or more of their
installment payments. In the United Kingdom, one bank found
that 10 percent of customers who made a payment to one of the
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two large providers have overdrawn their account beyond the
amount that they were allowed to overdraw. There is one provider,
Afterpay, in Australia, which had 20 percent of their new revenue
from late fees. So, we do have troubling indications that there are
a number of consumers who are late, who may be struggling, and
I am also worried that some of the providers may be building their
profit models on those late fees.
Chairman LYNCH. Right, and there is a lack of data from some
of these providers. Ms. Torres, do you have anything you want to
add on that? Any other data that we are getting?
Ms. TORRES. Yes. I would say that related to what Ms. Saunders
brought up of those Credit Karma users, the Credit Karma survey
participants, they did mention that of those people who had fallen
behind on payments, 72 percent also reported that they had seen
a hit to their credit, which is also a pretty concerning rate.
Chairman LYNCH. Let me ask then, would it be helpful if Con-
gress, if we introduced legislation that would require these buy
now, pay later and alternative financing methods to actually report
their credit histories to the credit rating agencies? Would that be
helpful? At least, it would give us a richer, a more granular credit
history on these consumer patterns.
Ms. BROADY. We are urging that the CFPB use its supervisory
powers to collect data to get a better understanding of what the
consumer experience actually is among all of the users of these
products, especially because, as you mentioned, it has been men-
tioned they are skewing younger, and maybe more consumers who
are not as familiar with the credit system as other seasoned users
might be.
Chairman LYNCH. Okay. And, Ms. Torres, is that what California
is doing?
Ms. TORRES. California has licensed them as lenders so they are
able to take in data, and this is the first year that we have had
data related to exactly what the volume is. But we are not exactly
sure about what the user experience is, which is why we are asking
the CFPB to supervise and analyze the data to get a better picture
view not just at the State level.
Chairman LYNCH. Okay. Thank you. And, Ms. Saunders, do you
have anything to add to that in terms of any efforts to get a more
granular look at some of these borrowing patterns?
Ms. SAUNDERS. I definitely support CFPB supervision and data
collection. I think it is worth considering whether they should be
reporting to credit bureaus, but I also think it is a misconception
that most of these users don’t have credit or have a thin score. I
think a lot of them do or could, and certainly Dr. Broady mentioned
cash flow underwriting. There are plenty of ways to become eligible
for traditional credit, but lending without the ability to pay is not
the best way to do that.
Chairman LYNCH. Okay. Thank you. I have exhausted my time.
I now recognize the ranking member of the task force, the gen-
tleman from Ohio, Mr. Davidson, for 5 minutes.
Mr. DAVIDSON. Thank you, Mr. Chairman. Ms. Lee, when I start-
ed thinking about this hearing, as I stated, buy now, pay later is
simply the idea of extending credit. That has been around way be-
fore the internet. But as we think about the payment systems
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14
today, could you briefly explain why this is different than payment
options that have been around for years, maybe as far back as the
innovation of the pencil?
Ms. LEE. Sure. It is fundamentally different, and a lot of that has
changed because of the technology in which you were are able to
facilitate many of these transactions or have these relationships. A
lot of people want to make the analogy to a layaway program, and
it is different in that it is an alternative method in which to make
payments. And unlike the past, in which you went directly to a
merchant to sign your contract as far as on a layaway, you now
have a fintech platform that is facilitating, both from a merchant
standpoint and from a consumer standpoint.
These are products that are designed for low interest, no fees, to
be able to have consumers be able to make their payments within
their own budgetary needs, and so it gives the consumer the power.
It puts them back into kind of how they want the flexible payment
to be able to fit their needs in which they are performing. It is
something that just is fundamentally different in that it is not a
revolving debt situation. It is one in which they want to satisfy
their own obligations in a very timely and in a short period of time.
Mr. DAVIDSON. Yes. Thank you for that, and timing is one of the
biggest things and the amount of automation. And in general, there
is a third party involved that is providing the service versus going
to the general store, and signing the book behind the counter—I
saw that on an episode of, ‘‘Little House on the Prairie.’’ The inno-
vation in the technology has made it so much more accessible. So,
who is using BNPL products?
Ms. LEE. As has been alluded to, Millennials are predominantly,
along with Gen Z, but we are starting to see it in other
generational cohorts as well. Right now, 2 out of 3 Millennials do
not own a credit card. They prefer debit cards. They prefer to have
the control of their own pocketbook within the access to their own
bank accounts, so that is who is predominantly using it. Eighty-five
percent of users using BNPL use a debit card and not a credit card,
which, again, inflates the overall cost. It gives them certainty. It
gives them the ability to budget, and it gives them the ability to
pay within their own means.
They are usually drawing every 2 weeks. We usually pay people
every 2 weeks, and so it allows them to have that flexibility to
meet what their payroll needs are as well. And in the U.K., most
people get paid once a month, so it is usually payment in three. So
it is a very different model in that sense, but it is giving consumers
that flexibility to be able to meet and budget these needs in a time-
frame which they prefer.
Mr. DAVIDSON. Thank you for the summary. Mr. Tate, when I
think about earned wage access programs, I remember one of my
first jobs working in a restaurant. I was a high school student. I
was either at school or at practice when the bank was open. I
would work at night when I had time, and then often, on Saturday
morning back in the day, the bank was open, but I would have a
meet, or a game, or something like that, so it was hard to get to
the bank. So, I had this piece of paper when we got real paychecks,
but I didn’t have money, and it was hard to have access to that.
Thankfully today, with the age of the internet, you can deposit this
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15
stuff online. You have internet banking, but you still need to access
the wages.
Could you explain how earned wage access is working, and I
would say just if you could also mention, and you touched on it in
your opening statement, but where we are at from the CFPB and
their treatment of earned wage access?
Mr. TATE. First, we have similar backgrounds. When I was a
teenager, my first job was as a busboy. So really quickly, EWA, the
way it works is, generally speaking, especially if you fall into the
framework of the CFPB, is that an EWA provider will partner with
an employer. The employer should do their due diligence to find the
right provider for them. And when they make that service available
after they have an agreement, it is voluntary. They cannot compel
an employee to use it. Generally speaking, again, if you fall into
the framework, there should be no fees for the transaction itself,
although the CFPB permits a subscription fee. Your calculations
are based on accrued wages, so the money you have earned up and
to that point in the pay period. There is no debt collection, and
there is no recourse.
And so, there is a very confined, kind of limited space for those
agreements to take place. Many of those agreements through the
employer are made free in many cases or at very low cost. Some
are even as cheap as a dollar. And if a need should arise, the em-
ployee can then voluntarily participate in the program, and the
provider will make those funds that have accrued available.
Mr. DAVIDSON. Thank you for the summary. My time has ex-
pired. I thank all of the witnesses for your testimony. I look for-
ward the rest of the hearing, and I yield back.
Chairman LYNCH. The gentleman yields back.
The Chair now recognizes the gentleman from New York, Mr.
Torres, for 5 minutes.
Mr. TORRES OF NEW YORK. Thank you, Mr. Chairman. My first
question is for Mr. Tate. Can you use earned wage access to access
your income on a daily basis?
Mr. TATE. In some cases, yes. There is a wide variety of pro-
grams and providers on the market, so there is no one-size-fits-all
model.
Mr. TORRES OF NEW YORK. But it could be in theory. Okay. If
I heard your testimony correctly, the fee-per-transaction could ex-
ceed $6?
Mr. TATE. It could. There are some that do.
Mr. TORRES OF NEW YORK. Okay.
Mr. TATE. But according to the Financial Health Network, that
is the range. And, again, as I mentioned—
Mr. TORRES OF NEW YORK. I just want to move on, if I can.
Mr. TATE. There is a wide majority of free products—
Mr. TORRES OF NEW YORK. I am going to reclaim my time. So,
$6 is the high. If you are a low-wage worker earning a minimum
wage of $7.25 an hour, then that fee is almost an hour’s worth of
work. It is almost one-eighth of an 8-hour workday. That strikes
me as excessive. Does that not strike you as excessive?
Mr. TATE. No. If it is Tuesday, and I have worked a week-and-
a-half and have accrued wages, and I have a flat tire or I need to
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go to the store, I am not sure why I have to wait until Friday to
make that happen.
Mr. TORRES OF NEW YORK. I am referencing the fee, but let’s
move on. I have a question for Ms. Lee. The Australian Finance In-
dustry Association has adopted a code of conduct for buy now, pay
later companies, a code of conduct that governs matters such as
late fees and minimum wage. Does the American trade association
for buy now, pay later companies have its own code of conduct?
Ms. LEE. We are working with the CFPB, and we have been in
active conversations with them and hold our members up to—
Mr. TORRES OF NEW YORK. But you don’t have one yet?
Ms. LEE. We are brand new as a trade association.
Mr. TORRES OF NEW YORK. Okay. Mr. Tate, does the American
trade association for earned wage access companies have its own
code of conduct?
Mr. TATE. I am not familiar with that trade association.
Mr. TORRES OF NEW YORK. No, is there a trade association for
earned wage access companies?
Mr. TATE. We represent, but whatever the title you used—
Mr. TORRES OF NEW YORK. Do you have a code of conduct?
Mr. TATE. No, we do not.
Mr. TORRES OF NEW YORK. Okay. Ms. Lee, what should the min-
imum age be for a customer who uses buy now, pay later financial
products?
Ms. LEE. The FTA’s buy now, pay later—ages 18 to 34 is who is
using the product right now.
Mr. TORRES OF NEW YORK. Could you legally use the product
below the age of 18?
Ms. LEE. I will have to double check on that.
Mr. TORRES OF NEW YORK. Okay. But would you support regula-
tions that require a minimum age of 18 and older?
Ms. LEE. I will confirm with our members as to if there is a min-
imum age.
Mr. TORRES OF NEW YORK. What should the minimum age be?
Ms. LEE. I will refer to the members.
Mr. TORRES OF NEW YORK. Okay. Because you said we should
advocate for thoughtful and balanced regulation.
Ms. LEE. I said the average cohort right now is between 18 and
35, and I will double check with the members to see if they have
set a minimum age.
Mr. TORRES OF NEW YORK. Okay. But I am asking your opinion
about what should the regulation be.
Ms. LEE. I will refer to the members on that.
Mr. TORRES OF NEW YORK. Okay. Is buy now, pay later a loan?
Ms. LEE. In California, it has been designated as a loan. It de-
pends. Different jurisdictions verify or—
Mr. TORRES OF NEW YORK. Do you think it should be classified
as a loan, as a general matter?
Ms. LEE. It is an extension of credit, and it is a payment alter-
native program that allows people to be able to pay for a good in
their own time.
Mr. TORRES OF NEW YORK. But if I—
Ms. LEE. That is an extension of credit.
Mr. TORRES OF NEW YORK. If I spent—
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Ms. LEE. In different jurisdictions, it is described—
Mr. TORRES OF NEW YORK. Sure, but if I spend your money now,
and then I pay you back with my money later, common sense
would dictate that I am borrowing from you and that you are lend-
ing to me. If it looks like a duck, and swims like a duck, and
quacks like a duck, then it is probably a duck. Actually, I will ask
this question of Ms. Lee. If a consumer pays on time and in full,
buy now, pay later companies do not typically report payments to
credit rating bureaus. But if a consumer fails to pay on time and
in full, then those same companies might report nonpayment to
creditors’ rating bureaus. Is it fair to report one without reporting
the other?
Ms. LEE. FTA members that are in the BNPL space do not report
either side. They are actively working with credit bureaus right
now. Right now, the credit bureaus are trying to figure out how
this data collection works, to be able to model accordingly. Tradi-
tionally, credit bureaus have used credit based off of monthly pulls
for longer-term loans, such as mortgages, student loans, and—
Mr. TORRES OF NEW YORK. I am going to interrupt you. I want
to make sure I heard you correctly. There are no BNPL companies
that report nonpayment?
Ms. LEE. There are some that engage with it.
Mr. TORRES OF NEW YORK. Would you characterize that as unfair
to do one without the other?
Ms. LEE. We want to work with the credit bureaus to make sure
that they do capture those who pay on time, a regular payment, be-
cause we do think that it is an ability to help provide good credit.
When someone who is paying consistently for 2 weeks on a min-
imum of time—
Mr. TORRES OF NEW YORK. I see my time has expired, but I
think you said earlier that buy now, pay later leads to more sav-
ings, but there was a Cardify AI survey suggesting that buy now,
pay later shoppers increased their spending by 10 percent to more
than 40 percent. Is there a concern that the buy now, pay later
product might cause consumers to live beyond their means and po-
tentially take on unsustainable debt?
Ms. LEE. Yes, they are using those because of the certainty. They
know exactly what the cost is going to be. They are not incurring
increased interest fees, they are not incurring additional cost, and
so they are using these products because it gives them certainty.
They know exactly when the payments are due, and 97 percent of
those using buy now, pay later products do not incur a late fee. So,
it gives them that consistency in being able to budget better within
their own means.
Mr. TORRES OF NEW YORK. My time has expired, but thank you.
Chairman LYNCH. The gentleman yields back.
The Chair now recognizes the gentleman from Texas, Mr. Ses-
sions, for 5 minutes and 30 seconds.
Mr. SESSIONS. Mr. Chairman, thank you very much, and thank
you for this very worthy, insightful hearing, and for the oppor-
tunity to hear our panel provide us their ideas.
Mr. Tate, I would like to see if you have an opinion about some-
thing that has been an issue, the Earned Wage Access Program.
Previously, we have had CFPB Directors who viewed this favor-
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18
ably, and it presumptively was a positive part of the ability for peo-
ple to use this. I am wondering if you have an opinion about this,
and the success of the model and what you think of it?
[No response.]
Mr. SESSIONS. That question is for Mr. Tate.
Mr. TATE. I’m sorry. I had to turn my microphone on.
Mr. SESSIONS. Yes, sir, and I apologize if you did not hear the
question. I should have said, ‘‘Mr. Tate,’’ earlier. Did you hear my
question, Mr. Tate, about the earned wage access?
Mr. TATE. Yes, sir.
Mr. SESSIONS. Thank you, sir.
Mr. TATE. To answer your question, back in 2017, Director
Cordray released what is now known as the Payday Rule, set aside
provisions within that rule, earned wage access products as an al-
ternative, and then he laid kind of a framework or a foundation for
these products to thrive and grow. And Director Kraninger, in
2020, when she issued an advisory opinion, expanded on the
groundwork that Director Cordray laid back in 2017. And, in fact,
Director Cordray, when he released the rule, I guess gave a speech
or made a statement which is on the CFPB’s website today, talking
about how these products are a positive thing for people.
And I have a quote here: ‘‘The rule also excludes from coverage
some new fintech innovations, such as certain no-cost advances and
programs, to advance earned wages when offered by employers or
their business partners.’’
And again, in 2020, Director Kraninger kind of built upon that,
and then said and made it clear that even if you don’t fall within
the framework of the advisory opinion, it said that they would take
a totality of the circumstance view of each product and provider
and make a determination on their own. And just because you are
not within the framework does not, per se, make you credit.
So I think that together, they didn’t agree on much, but I think
together, they have expanded this product, which is, as you men-
tioned, very popular. I think there are about 45 to 55 million users
here. And if you read the Financial Health Network’s report, or
Mercator’s report, or KPMG’s report, they all talk about how this
product is significantly less than alternatives that are out there on
the market.
Mr. SESSIONS. Mr. Tate, thank you very much. This is the kind
of feedback that I believe helps the committee to recognize that
programs like this actually help the people that it was intended for,
and that was insightful.
And, Mr. Chairman, I want to thank you for not only having this
hearing, but actually vetting out, not just the CFPB, but also peo-
ple who are in the marketplace, to give opinions about the effec-
tiveness of what we are trying to do, and that is to help consumers
with a balance, but also to make sure that the net comes out with
an advantage overall for the consumer in this process.
And Mr. Tate, and Ms. Lee, I want to thank you very much for
your participation today.
Mr. Chairman, I yield back my time.
Chairman LYNCH. The gentleman yields back.
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The Chair is now very pleased to recognize the Chair of the full
Financial Services Committee, Chairwoman Waters, who has been
working on this issue for a very, very, very long time.
Chairwoman WATERS. Thank you so very much. I appreciate the
opportunity to share a few remarks, and maybe ask a question or
two.
Ms. Saunders and Ms. Torres, earned wage access allows employ-
ees to access part of their earned income immediately, without
them having to wait until the end of the pay period. To me, this
sounds very similar to a payday loan. However, it seems that the
CFPB, under former Director Kraninger, did not agree.
In late 2020, the CFPB issued an advisory opinion which stated
that certain earned wage access (EWA) products were not credit
under the Truth in Lending Act (TILA). Earned wage access may
create a cycle of unsustainable borrowing as employees who should
be paid a viable wage borrow on their own hard-earned income,
and are forced to pay additional fees to access their income. I fear
that the underlying problem is the fact that too many employees
are not paid a livable wage. Earned wage access products have
been developed by fintechs, but it seems that their basic business
model is less about innovation and more about evasion.
Do you think it is a priority for the new CFPB Director, Rohit
Chopra, to revisit the advisory opinion, or do you think that earned
wage access should be treated as credit, and can you tell us how
earned wage access users, who are oftentimes working-class hourly
workers, are affected by the lack of TILA protections, in particular?
Ms. SAUNDERS. I will start. Yes, I do think that the CFPB should
revisit the opinion issued under Director Kraninger. What hap-
pened under Mr. Cordray is he was addressing the horrible abuses
of conventional payday loans, and this was a different product that
posed less, although still significant concerns.
But evasions of credit laws are incredibly important to stop, and
this does create a cycle of reborrowing, and if you can’t pay an ex-
pense, this just leaves a hole in the next week, and that causes
fees. And as Congressman Torres said, that could be an hour or
more of a wage worker’s pay.
Chairwoman WATERS. Thank you very much, and I appreciate
the opportunity. I yield back.
Chairman LYNCH. The gentlelady yields back.
The Chair now recognizes the gentleman from Missouri, Mr.
Luetkemeyer, for 5 minutes.
Mr. LUETKEMEYER. Thank you, Mr. Chairman. This is an inter-
esting hearing today, and Ms. Lee, I want to thank you for your
testimony today. You indicated that Mr. Tate, a while ago, made
a comment in his testimony that the Federal Reserve had a study
which said that almost 40 percent of Americans could not cover a
$400 emergency tonight.
So, if I go home tonight and my refrigerator is out, it takes any-
where from $800 to $1,000 to go buy a new refrigerator. We have
two kids at home, and I have to be able to get them something to
eat tonight, and tomorrow for breakfast, and the next evening as
well. I have to have a refrigerator. So, I go someplace, and for them
to be able to sell me one, I may have to give them $200 today, and
$200 next week, or in 2 weeks, and so on.
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And your comments are that it empowers an individual to make
decisions on what they want to do. They can do without or they can
go borrow money from someplace else, or they can go use this
method of payment, buy now, pay later, and they need control. This
gives them the control to make that decision. It gives them the
flexibility to help with their budgeting.
And you indicated that 97 percent of the people experienced no
late fee. Is that correct? Did I hear you correctly on that?
Ms. LEE. That is correct.
Mr. LUETKEMEYER. So in other words, 97 percent of the people
use these products and this method of purchasing things and pay-
ing for things in an appropriate manner?
Ms. LEE. Correct.
Mr. LUETKEMEYER. Ms. Saunders continues to talk about all of
the abuse that is going on, and I am kind of curious, do you know
what percentage of that 3 percent who are late, are abused by late
fees?
Ms. LEE. If I am hearing your question correctly, it is on the rev-
enue model of a BNPL, less than 15 percent of their revenues are
attached to a late fee. So, these are not models that reward late
fees or recurring debt. BNPL products help consumers have a flexi-
ble payment option, with clear and assignable payment periods
that they can meet. It is in their interest for them to meet these
payment requirements so that they can use this product over and
over again, and have—
Mr. LUETKEMEYER. My point is that when only 3 percent of the
people even experience a late fee, and how many of those are
abused by companies, I would think that would be a pretty small
figure of that 3 percent.
Ms. LEE. Yes.
Mr. LUETKEMEYER. Now, I am not condoning those folks. They
should not be doing that. We should be finding a way to punish
them and keep that from happening. But I think, just don’t
overblow the problem here and throw the baby out with the
bathwater, and that this is a very, very good way of allowing peo-
ple to purchase products, and to pay for them in a timely manner,
as they can afford them.
Ms. LEE. And I would just say, one thing you also need to under-
stand about the mechanics behind this is when someone does miss
a payment or have a late payment, their account is immediately
paused. They are not able to participate in any more buy now, pay
later products, or have that service provided to them again until
they rectify or until they satisfy that original obligation.
So, it is not something that is trying to reward more buying
power when you cannot meet the minimum payments. It is trying
to design people to have clear and assignable and accurate pay-
ment methods accountable to what their pay periods might be.
Mr. LUETKEMEYER. I think that brings up the question of, what
responsibility does the consumer bear with repaying a debt, with
repaying a buy now, pay later situation? They made the decision
to purchase something in this manner. The responsibility falls on
them, does it not?
Ms. LEE. Yes, it does.
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Mr. LUETKEMEYER. And we shouldn’t be penalizing the people
who are trying to sell products and services in that manner.
Also, I think one of the things pointed out, and I think the chair-
man did a good job of this today, with regards to some folks who
are—97 percent of the people who are paying on time and making
their payments appropriately don’t seem to be getting credit for
that with the credit bureaus, and you are indicating that your asso-
ciation is working with the credit bureaus to see if this can be
done. We do this with utilities and rent. I know on this committee,
over the last several years, we have added those things to credit
bureau files for people to be able to have reported on them, so
when they do make timely payments, they are getting credit for
that. I think that is something that we need to be continuing to
work on. Could you just elaborate a little bit more on that, please?
Ms. LEE. And we applaud the efforts to modernize credit bu-
reaus, and are working with them actively so that they can prop-
erly assess and analyze what those data that we would be sending
them. This is data that would be coming into them—
Mr. LUETKEMEYER. Let me interrupt. My time is about up. I
apologize. So, are you talking about us having to legislatively tell
people, when you implement a program like this you are going to
have to automatically report, or are the credit bureaus working
with the different business entities and different associations to
say, ‘‘Hey, we want to work with you to be able to help the con-
sumers be able to utilize these products?’’
Ms. LEE. It would be the latter. Private companies are actively
working with the credit bureaus so that they understand kind of
what this data is saying, how the consumers are using it, what it
means for someone to be paying $25 every 2 weeks over the course
of 4 to 6 to 8 weeks. What that means for them from a credit per-
spective is something that is consistently paying, on time, not in-
curring late fees, how that can be a positive aspect for how some-
one could build credit. And so, we want to make sure that they are
capturing that data correctly and that it can be seen as a positive,
that it is not being seen as a negative tool, just because of the fre-
quency in which they are using these products.
These are new products coming onto the marketplace. We want
to ensure that the credit bureaus understand them properly so that
they do not do harm to the consumers, but actually add to the over-
all positive credit history.
Mr. LUETKEMEYER. I thank you for that, and I encourage your
association to continue to work with the credit bureaus to make
sure that folks can have their successful use of these products as
well.
Thank you, Mr. Chairman. I yield back.
Chairman LYNCH. The gentleman yields back.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Steil, for 5 minutes.
Mr. STEIL. Thank you very much, Mr. Chairman. We are experi-
encing a labor crisis in the United States. You can drive almost
anywhere—on my drive to the airport to come out to Washington,
D.C., I see help wanted signs. There is a mismatch in our economy
right now between the 10 million jobs that are available and get-
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ting workers back to work. I think it is something that we should
spend a lot of time digging into.
This is an interesting hearing, in particular as we look at the
ability of EWA to really kind of alter some of the labor market. Mr.
Tate, I am curious about the role that EWA products can play in
encouraging worker participation, in improving employee retention,
where we can actually better connect the work and labor of an indi-
vidual to the quick payout. I often think of how a waiter or a wait-
ress or a bartender has quick access to their cash. They can actu-
ally flex how much money they make by maybe picking up an extra
shift, working a Friday night, or a Saturday night. That is hard
work, but you get to walk home at the end of that shift with money
in your pocket.
It’s different if you are working for some of the largest companies
in the United States. You do not have that opportunity to pick up
an extra shift and put money in your pocket. I am thinking you
might know you have a bill due on Monday, or you might have a
need for some extra cash as people are going out and doing Christ-
mas shopping, and you want to pick up an extra shift. But you
might not have that ability to pull that cash forward to be able to
benefit from the labor that you did that weekend so you can knock
out some Christmas shopping, maybe on Sunday.
Can you comment on how EWA services are provided through
some of these employee partnerships with the employers and
whether or not it has an impact on employee retention?
Mr. TATE. Certainly. I agree with my colleague on the panel, Ms.
Broady, when she touched on bringing financial services to people
where they are, and I think technology allows us to do that in ways
that we could not conceive of 5 or 10 years ago.
From everything that I have read, and the companies that I have
talked to, this is used, as you mentioned, as a tool to retain em-
ployees. It helps them manage their money. It helps them smooth
out income volatility. I also think, at the same time, this is a dig-
nity and empowerment tool. I think this is a way for people to take
more control of their money and allow them to make decisions in
real time, again, in need, if something were to come up, which I
have certainly experienced.
I think the conversation in mind that we are all having today
about all of these products is specifically on EWA. We should be
keeping the consumer in mind, and what would you do in those
places, and we should be giving those consumers more tools to
manage their day-to-day financial needs.
Mr. STEIL. Earlier, you were being asked questions about the fee
range, and you said that the top end was around $7. What is the
low end?
Mr. TATE. In a lot of cases, it is free.
Mr. STEIL. It is free. So, that means somebody ultimately is foot-
ing that bill, but it would often then be the employer that is view-
ing this as value-additive to their workers in that structure.
Mr. TATE. Absolutely. And in many cases, this is a popular ben-
efit, and you can see in the future where you can see a worker or
an employee, a potential employee, thinking, gee, Company A does
have EWA, and Company B doesn’t, and so I am going to the com-
pany that has the EWA option, and that is one of many factors.
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Mr. STEIL. And maybe for the same reasons, some people are at-
tracted to certain service industries that are tipped heavy.
Mr. TATE. Correct.
Mr. STEIL. My example of working in a restaurant—I used to
work at an Applebee’s, and I worked at an Olive Garden. You walk
away at the end of that shift with money in your pocket. But this
gives other types of employers that opportunity to directly connect
the work and the labor that is being provided by an individual with
that payment.
Let me shift gears, if I can with you, Mr. Tate. One of the con-
cerns would be, of course, what happens if an employee pulls that
money forward and then, for whatever reason, life changes, and
they leave the job. Holy smokes, would they be on the hook for this
money that is pulled forward?
Mr. TATE. The employer?
Mr. STEIL. The employee. The employer—good luck to that per-
son. I am concerned about the workers.
Mr. TATE. No. These are no-recourse products, especially if you
are fitting within the CFPB’s framework that was developed by Di-
rector Cordray.
Mr. STEIL. So, there is no risk to the employee that they are
going to be on the hook for pulling a wage forward?
Mr. TATE. No. Similar to the numbers on buy now, pay later, it
is 97 percent recovery, and that is reported in Mercator as well as
the Financial Health Network.
Mr. STEIL. I think that is an important point, and you and I
know that, but I don’t think that everybody fully appreciates that.
Because I think in your head, you are thinking this is probably a
recourse loan, as it wants to be portrayed, but it is not.
Mr. TATE. It is not a loan.
Mr. STEIL. It is not a recourse and it is not a loan. I think that
is just a really important point to walk away with.
You are familiar with the CFPB’s issue, their advisory opinion
last year, that EWA services are not credit, exactly what you are
saying?
Mr. TATE. Correct.
Mr. STEIL. Can you further explain the CFPB’s stance on this,
briefly?
Mr. TATE. When they issued the advisory opinion, again, they
were building on the principles laid out, or that were set aside in
the payday rule in 2017 by Director Cordray. Director Kraninger
expands upon that, but if you read the commentary and kind of the
footnotes in those conversations when they lay out what fits in the
framework, they also make it clear, again, that they are taking a
totality of the circumstance test. So in essence, they are allowing
variations of the framework they are putting in place because—I
can’t put myself in their shoes, but I would assume that they recog-
nize that we are in a marketplace with lots of innovation. I don’t
know what new products are going to come out next week or next
year.
Mr. STEIL. I appreciate your time, and I appreciate all of you
being here. I wish I had time to dive into additional questions. Mr.
Chairman, with that, I will yield back.
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Chairman LYNCH. The gentleman yields back. The Chair now
recognizes himself for 5 minutes, and I would like to talk about the
earned wage access piece. I was an ironworker for about 20 years.
I worked mostly for steel erectors. But it was customary in our in-
dustry that we worked Monday through Friday, and then payday
was the following Wednesday. In my business, the ironworking in-
dustry, we had what we called a, ‘‘drag.’’ You could actually get
what you call now, ‘‘earned wage access.’’ You could get no more
than a couple hundred bucks in advance of your payday the fol-
lowing week.
In my situation, however, I was a member of a union, so we had
union protections that were between me and my employer and the
bank, so that I had added reassurance, and I had recourse to make
sure that I was treated fairly.
I am just curious, in some of these low-wage industries where
there are not those protections, is there a conflict? I know it seems
like this is an employer decision as to which fintech they choose to
deal with, which platform, if you will, and the terms of payment
are various, the arrangements that are made here. I am just curi-
ous, is there a danger where the employees is not part of this con-
versation regarding the terms on which that early wage access
might be gained? Is there a danger that their interest may be
harmed in that agreement between the employer and the fintech
company that is going to conduct this?
Ms. Saunders, any views on that?
Ms. SAUNDERS. I am concerned about companies having a hard
time competing in their providers. I know that there are some that
offer these programs for free and they have a hard time competing
against ones that charge the employer, and some employers would
rather have the low-wage worker pay.
Chairman LYNCH. Okay.
Ms. SAUNDERS. That concerns me.
Chairman LYNCH. Let me jump to something else. Lately, we
have been hearing about some of the big players getting involved
here. Visa is looking at the amount of money that is being gen-
erated, diverted from the traditional banking system. Mastercard
and some of the other big players are getting involved in the buy
now, pay later space. There seems to be more going on here. There
is cross-selling, and the importance of that data itself.
What other implications might there be with respect to—and we
had Mr. Chopra in from the CFPB last week, and he wanted to ask
Amazon and Apple and others regarding their data collection on
the financial services side. So, are there some issues that we should
be cognizant of or actively investigating with respect to how con-
sumer data is being used in this context? Ms. Saunders?
Ms. SAUNDERS. Yes, absolutely. Any time consumer data is being
collected, we want to make sure that it is in ways that consumers
would expect, and that they would approve of. And I am concerned
that some of these models that look great, look too good to be true,
are they really vehicles to collect data, to pitch other products? Are
they something different than what they appear? It is always im-
portant to know what the real business model is and how data is
being used.
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Chairman LYNCH. Ms. Broady, are there any limitations in terms
of how that data is gathered and used in this space?
Ms. BROADY. These companies use data and algorithms to meas-
ure how people are going to pay, but it doesn’t affect their credit
score like it does for payday lenders or credit cards. Of course, we
have to have some type of data, but this data doesn’t stay on your
credit report and affect it for 7 to 10 years like a FICO score would.
Chairman LYNCH. Yes, okay. Ms. Torres?
Ms. TORRES. Yes. I think that another concern to be aware of is
that this data can be used to push other products onto a consumer
who might not have been looking for that product in the first place.
And so, it is another way to maybe try to entice—do the cross-sell-
ing of products to consumers to assume more debt that they might
not be able to handle, or that they weren’t looking for in the first
place.
Chairman LYNCH. Ms. Lee?
Ms. LEE. FTA’s BNPL players only share consumer data with
merchants for the fulfillment of an order.
Chairman LYNCH. Okay. And Mr. Tate, any concerns regarding
the use of data, especially with some of these big players getting
into the space?
Mr. TATE. Not that I am aware of, no.
Chairman LYNCH. Okay. Thank you. My time has expired. I now
recognize the ranking member of the task force, the gentleman
from Ohio, Mr. Davidson, for 5 minutes.
Mr. DAVIDSON. Thank you, Mr. Chairman, and I am glad we get
an extra round to ask some questions here. and Mr. Torres, just
to react to one of your comments on cross-selling, I love cross-sell-
ing. I go to Amazon. Jeff Bezos has built a heck of a company be-
cause, hey, if I like this, I might like that. That is one of the best
uses of data, if the information can be protected and kept private.
And the privacy concerns, I think need to be paramount. For our
whole economy, one of the most important things Congress could
do would be to pass an updated privacy law. Within just the juris-
diction here, I was so encouraged by our last hearing on financial
privacy, because there are a lot of things that go on there.
Ms. Lee, if you go back to the cartoon days, probably everyone
has heard the phrase, ‘‘I’ll gladly pay you Tuesday for a hamburger
today.’’ That is an extension of credit. You know that you don’t
have to give the hamburger. It is just an offer. It is a service that
is provided.
Now, some people go from personally lending to a friend, at no
cost, or say, ‘‘I’ll give you a hundred bucks, and you give me back
$110 next week,’’ and no one does the math. It is just a simple fee.
Then, you formalize it and go from, ‘‘I did that for a friend or two.
Maybe I will just start a business.’’ How does somebody get into
this business? Do you have to launch a bank? Can you get into this
space just applying the technology, and then what are the obliga-
tions to protect consumer privacy if you do set up a business in this
space?
Ms. LEE. I would say it is probably not as easy as creating a
burger stand, but a little bit more complicated and complex. And
there are a lot of players in this space already, I would say, and
it does require you to be adherent to Federal laws, State laws,
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State consumer protection laws, a whole host of regulations that
are there to protect the consumer.
It would require a tremendous amount of product design, the ca-
pabilities, the relationships to have with lending partners, banks
and others, and to have those relationships with merchants, along
with then going out and building a product to entice consumers to
be able to use this product in a responsible manner.
So, there is a whole host of different things. It is not just some-
thing that you can turnkey overnight. These are sophisticated. The
members that I work with are very large, sophisticated companies,
but what they are doing is providing that service, and that means,
and making it easier. To the early analogy, there is that platform,
as we are all now more mobile, as we are all more digital, as we
are using our payment systems at the click of a button. They are
able to talk to merchants and consumers so that people can have
both the certainty of when that payment is occurring, and know
that the payment is going to be taken in a responsible manner.
Merchants also have that comfort in knowing that platform allows
them to also receive payment for their products.
So, it is an ecosystem that is large, it can be complex, but one
that technology is allowing us to have.
Mr. DAVIDSON. Yes. I think you made the point that there are
no laws. There are laws that all of these businesses would have to
be subject to, and, frankly, they also have duty of care with the
data. They would potentially face liability for inappropriate use or
breach, things like that.
We should clarify some of our laws, and one of the things that
I think we try to force everything that is innovative into something
that is in the past instead of often doing the work here to update
the framework.
When you think about alternative remittance systems, I think of
the hawala network. In America, our system is not really built
around that, but it is certainly permissible to do it. That doesn’t
mean you are exempt from money service business laws or know-
your-customer requirements if you are in that business, but it oper-
ates differently in terms of how the payments are due, to whom
they are due, and whether information moves or the cash moves,
all that happens.
How would you explain, yes, we are compliant with some laws,
but we shouldn’t be treated as if we are payday lenders, or should
you, or when should somebody?
Ms. LEE. Sure. I would say that we are fundamentally different.
Payday lenders are enticing people—or not enticing, but they are
products that are built for people to have a long-term debt cycle,
they have high interest rates, and people are getting in revolving
debt that takes years oftentimes to pay off, whereas buy now, pay
later, is satisfying that obligation in a very short time, with low
fees, and zero interest, to enable the consumers to have that flexi-
bility. So, fundamentally, they are two very, very different prod-
ucts, and should be treated as such.
Mr. DAVIDSON. Thank you. My time has expired, and I really ap-
preciate the time given to prepare for this and the hearing.
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Chairman LYNCH. I thank the gentleman. The gentleman yields
back. The Chair now recognizes the Chair of the full Financial
Services Committee, Chairwoman Waters, for 5 minutes.
Chairwoman WATERS. Thank you very much. I would like to di-
rect this question to Dr. Broady. I am interested in how low- and
moderate-income consumers, and borrowers of color, in particular,
are using these emerging fintech consumer loan products. Buy now,
pay later allows a consumer to buy and take immediate possession
of an item while paying for it over a period of time.
While I am hopeful that emergent fintech products can offer as-
sistance, I am concerned that some of these new entities may not
be providing consumers with clear disclosures about the terms and
conditions of these new products, as is typically required for exten-
sion of credit under the Truth in Lending Act. Additionally, as
many buy now, pay later products do not report payments, I won-
der, what does this mean in relationship to credit bureaus and
whether or not they are reported or how that is handled?
Let me just say that some of these products that I am hearing
about are similar to products that were used years ago. There was
something that was familiar to the Black community called lay-
away plans, and with the layaway plans you would see an item
that you would like to have, but you couldn’t afford it. You would
pay something down on it, and then continue paying for it until it
was paid for, and then you would get the item. I don’t think you
got it ahead of time.
And, of course, we are familiar with the old installment loan pay-
ments that we used to do when families wanted to buy a refrig-
erator or something that they could not afford. They would get the
refrigerator, and it would be on an installment loan. You would pay
something down, and then pay every month until you paid it off.
Now, some of these sound like convenient ways to get things
done, but what I am interested in is this: Because of the wealth
gap in the Black community, we have often paid an awful lot of
money in order to get some products that we desperately needed.
Some of the money was hidden because the products we were buy-
ing were way overpriced anyway—the televisions, the refrigerators,
and all of that. And I guess now what we are looking at, the possi-
bility of a buy now, pay later, but there may be some interest
charges here somewhere.
Tell me what you know about all of this and what do you think
about it?
Ms. BROADY. There are a couple of differences. One, payday lend-
ers and layaway plans and things like that can be targeted to
Black neighborhoods. We know that payday lenders are overrepre-
sented in Black neighborhood, where the programs that you are
speaking about are not targeted. They are on the internet. Every-
one has access to them, so they are not targeted towards a specific
population. In that way, they are not as predatory as payday lend-
ers.
The second thing is that they do provide people with the ability
to buy things that they need in an emergency, without charging set
interest that is associated with payday lenders. So in that way, you
can get something, and you can get it immediately, while you are
still paying for it. If you don’t finish paying for it, then there is no
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28
real penalty to it. It is not like the interest keeps accruing. So you
get the product, you pay for it, and if you don’t pay for it, then you
don’t get to use that particular system again. So, the penalty really
is with the company that is providing the loan, not as much with
the consumer, like with payday lenders.
Chairwoman WATERS. I am interested in your thinking that
products are not targeted. Targeting is absolutely a way by which
sales are done, communities are identified, and communities are
excluded. So, what do you mean that they are not targeted?
Ms. BROADY. They are not targeted in the same way as payday
lenders, who literally set up a brick-and-mortar place, a place of
business, in a Black neighborhood.
Chairwoman WATERS. How do you know that?
Ms. BROADY. I did my dissertation on payday lenders, so I know
how they target—
Chairwoman WATERS. But I am talking about the other products
that you say now are widely targeted, rather than specifically tar-
geted. Targeting is a process that is used on the internet in so
many different ways. So, when you say that it is not targeted to
certain communities, certain products, I am interested in, how do
you know that?
Ms. BROADY. I would simply say it is not in the same way as lo-
cating in a particular area, that they can target based on what you
searched for or things that you have looked at online, but they are
not setting up in a particular neighborhood based on who is located
there, like payday lenders would.
Chairwoman WATERS. I question that, but I like the idea that we
need the Consumer Financial Protection Bureau to look at all of
these products so that we can understand them and know what we
are buying, know what we are paying, know where the hidden fees
are, and all of that. So, I appreciate your information, but I do rec-
ommend that we get the Consumer Financial Protection Bureau to
look deeply at all of these.
I yield back, and thank you very much.
Chairman LYNCH. The gentlelady yields back. Just following up
on that, Ms. Broady, a lender can target people with thin credit
files, and in a way, that does target a certain demographic, right?
Ms. BROADY. Yes.
Chairman LYNCH. Not geographic, but a demographic.
Ms. BROADY. Yes.
Chairman LYNCH. Thank you.
The Chair now recognizes the gentleman from New York, Mr.
Torres, for 5 minutes.
Mr. TORRES OF NEW YORK. Thank you, Mr. Chairman. Buy now,
pay later companies typically charge fees to merchants but not to
consumers at the point of sale, but buy now, pay later companies
do charge late fees to consumers who fail to pay on time and in
full. My question for you, Ms. Lee, is if there were only fees to mer-
chants but no late fees to consumers, would the buy now, pay later
companies remain profitable?
Ms. LEE. I would say yes, and that is what their modeling is
based off of. Right now, we have 45 million users in the United
States spending this last year about $21 billion. Now, that might
seem like really large numbers, but it is also only 2 percent of the
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29
overall online retail spend, so there is a lot of growth to occur. But
yes, that is a revenue model on charging just merchants fees to be
successful.
Mr. TORRES OF NEW YORK. And, Ms. Saunders, do you have re-
search on the extent to which the BNPL companies depend on late
fees to be profitable?
Ms. SAUNDERS. I don’t, but I do know that some observers of the
market have pointed out that merchant fees may go down with
competition, and so I am worried that costs may shift more to con-
sumers.
Mr. TORRES OF NEW YORK. Ms. Lee, I want to revisit a question
I asked you, because I was puzzled by the resistance to answering
what I thought was a straightforward question. Should there be a
minimum age requirement for the use of buy now, pay later finan-
cial products?
Ms. LEE. I would say many of the FTA’s companies that I rep-
resent do have a minimum of not allowing anybody under the age
of 18, and so these are standards that—I can’t speak for the entire
industry; I can only speak for those that are members of our orga-
nization. And so having that minimum, I think, is a responsible
matter.
Mr. TORRES OF NEW YORK. Okay. So, you do support them. And
Ms. Lee, what percentage of buy now, pay later customers have
fallen behind on their payments? There are reports that as many
as a third of customers have fallen behind on their payments. Are
you aware of those reports?
Ms. LEE. I would say on the membership in which I represent,
97 percent of consumers do not incur a late fee.
Mr. TORRES OF NEW YORK. Okay. Ms. Saunders, Ms. Torres, do
you have any thoughts on the extent of delinquency in the BNPL
industry?
Ms. SAUNDERS. I would just point out that they secure repay-
ment automatically. So, they take your debit card or, in some cases,
a credit card. Some people are paying credit to get credit. So, it is
easy to collect, and that doesn’t mean that it is affordable, but Ms.
Torres may have more to add.
Ms. TORRES. This is based on user data. The survey that we are
citing was done by Credit Karma, of 1,000 users, and a third of
those 1,000 surveyed said that they were not able to keep up with
payments. And as Ms. Saunders pointed out, because they do have
direct access to your bank account, or a credit card to get that pay-
ment, that can pose a number of risks for consumers who don’t
have that money available to them, such as overdrafts, and non-
sufficient funds, which can lead to someone ultimately falling out
of the banking system if they are not able to keep up with these
payments. So, I think that this is definitely another reason that we
underscore the reason for the CFPB to take a look at what the con-
sumer experience is, and a comprehensive overview of all of the
members who participate in this type of lending.
Mr. TORRES OF NEW YORK. Ms. Broady, these fintech cashflow
products exist to serve those who have historically been under-
served by the traditional financial system. Do these products actu-
ally affect the racial and socioeconomic disparities in access to fi-
nancial services?
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30
Ms. BROADY. They do provide access to banking services that
many people don’t have or that haven’t had as banks move out of
their neighborhoods. So in that way, they do provide access. I can’t
particularly speak to how they have changed the racial wealth gap.
Mr. TORRES OF NEW YORK. Are there any studies that have
shown a reduction in access to financial services, or a reduction in
racial disparities in access to financial services?
Ms. BROADY. Yes. Actually, the Brookings Institution is releasing
a study in that regard later today that will talk about banks that
have been leaving Black neighborhoods, and how that has affected
savings rates. I cannot speak to how fintech companies have
changed that, though.
Mr. TORRES OF NEW YORK. Okay. So, we don’t know. We don’t
have enough information yet to determine if these products are ac-
tually reducing racial disparities in access to financial services.
Ms. BROADY. I don’t. Someone may, but I do not. I can speak to
the banking part, how banks leaving has hurt Black neighborhoods
and communities, but I can’t speak specifically to how fintech com-
panies have helped. I believe that they are helping, but I can’t pro-
vide particular data at this time.
Mr. TORRES OF NEW YORK. Okay. That is the extent of my ques-
tioning. Thank you.
Chairman LYNCH. The gentleman yields back.
This has been a very good discussion, and it was helpful having
a mix of perspectives. I would like to thank our witnesses for their
testimony today.
The Chair notes that some Members may have additional ques-
tions for these witnesses, which they may wish to submit in writ-
ing. Without objection, the hearing record will remain open for 5
legislative days for Members to submit written questions to these
witnesses and to place their responses in the record. Also, without
objection, Members will have 5 legislative days to submit extra-
neous materials to the Chair for inclusion in the record.
This hearing is now adjourned. Thank you.
[Whereupon, at 11:35 a.m., the hearing was adjourned.]
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APPENDIX
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