How purchasing plans and payday advances could change in 2022
IIt’s been a big year for non-traditional financing options like “buy now, pay later” and cash advance applications.
Buy now, pay later companies offer over-the-counter financing that allows buyers to split the cost of a purchase into several smaller payments. Payday advances are offered by employers or apps and give consumers access to their expected earnings before payday.
Both financing plans provide cash fast to cash-strapped consumers, and both have grown in popularity in recent years, especially as the pandemic has plunged finances into disarray.
As their use skyrockets, competitors and regulators have taken notice. Here’s how these new financing options could change in 2022.
Banks strengthen BNPL’s presence
BNPL is expected to account for 6% of all US dollars spent online this year, according to a September study conducted by consulting firm Accenture and commissioned by BNPL Afterpay. By 2025, that number is expected to be 13%.
Currently, the BNPL market is dominated by apps like Afterpay and Affirm, as well as some credit card companies. Over the coming year, big banks may come up with their own BNPL options, says Ruby Walia, senior advisor for digital banking at digital consulting firm Mobiquity.
“Banks don’t really want to hand over business to fintech players,” he says. “If they can offer their own BNPL service to their customers, they will at some point. “
Banks can offer a BNPL co-branded service with a retailer, similar to co-branded credit cards some already have, he says. Or they could copy the credit cards point of view on BNPL and allow customers to split debit card purchases into smaller payments after the purchase.
Likely competition for popular salary advances
Companies are teaming up with companies like DailyPay to allow workers to tap into their expected earnings early. Consumers can also download a cash advance application like Earnin or Dave who examines your bank account or tracks your hours worked to figure out how much you get paid and when, so you can access some of that amount and pay it back on your next payday.
Some of the country’s largest employers – Target, Walmart, and Amazon included – already offer salary advances paid by the employer.
In 2020, workers used a payday advance service nearly 56 million times to gain access to a total of $ 9.5 billion, according to a study by research and consulting firm Aite-Novarica Group. This is an increase from 37.2 million uses totaling $ 6.3 billion in 2019.
Where there is demand, competition follows. Innovation is expected in the rapidly evolving fintech industry, says Brian Tate, CEO and President of the Innovative Payments Association, which champions the electronic payments industry. He says he welcomes newcomers.
“Where we are today is completely different from where we were five years ago or even three years ago,” he says. “Our hope is that there will be more competition, more suppliers, and I think that is a benefit for the customer. “
Regulations on the horizon
Lawmakers and regulators have been reflecting on the rules that should govern BNPL and payday loan companies in recent years. In November, the House Committee on Financial Services hosted a hearing on emerging financial technology companies to discuss the pros and cons of both types of financing.
Consumer advocates say BNPL companies and cash advance services provide credit and should have the same protections as credit card issuers and personal lenders.
“Our view has always been for these two products that they are loans. Someone lends you money and you pay it back at a later date, ”says Rachel Gittleman, head of financial services outreach at the Consumer Federation of America, a consumer advocacy group.
But advocates of new financial products say too much regulation could stifle innovation.
“Whatever product you’re talking about, it’s new products,” Tate says. “These are not the same products in their concept that people may be familiar with. “
Payday advances may not be getting the attention of regulators right now, but they could in years to come, he says.
The Consumer Financial Protection Bureau issued an advisory opinion in 2020 that certain advances offered through an employer are not considered credit under the Truth in Lending Act, which governs most types of consumer credit. Shortly after Rohit Chopra was confirmed earlier this year as CFPB’s new director, consumer groups sent a letter urging him to rescind his review.
How to approach these financing options
The lack of regulation and a flood of new products mean that it is up to the consumer to research, compare options and plan before using a new financial product.
Here are some tips to keep you on track when trying a new type of financing:
- Do your research. No two BNPL or payday advance service companies have the same fees or conditions, so read the company information to understand the pros and cons, says the certified financial planner based in the company. Illinois, Maggie Klokkenga.
- Know your budget. Whether you add a few small installment loans or take part of your paycheck earlier, it will affect your budget. Knowing when to repay and how much will be there at that time can help you avoid overdrafting.
- Track your usage. New services like BNPL and payday advances can be used safely if you wait for repayment. Keep track of how many BNPL services you use, or how many overdue advances you have, to avoid missed payments and late fees.
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