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It’s been a big year for nontraditional financing options like "buy now, pay later" and cash advance apps.
Buy now, pay later companies offer at-checkout financing that lets shoppers split the cost of a purchase into multiple smaller payments. Paycheck advances are offered by employers or apps and give consumers access to their expected earnings before payday.
Both financing plans provide quick money for cash-strapped consumers, and both have gained popularity in the last few years, especially as the pandemic threw finances into disarray.
As their usage skyrockets, competitors and regulators have taken notice. Here’s how these emerging financing options could change in 2022.
Banks build a BNPL presence
BNPL is expected to account for 6% of all U.S. dollars spent online this year, according to a September study conducted by consulting firm Accenture and commissioned by BNPL company Afterpay. By 2025, that number is projected to be 13%.
Right now, the BNPL market is dominated by apps like Afterpay and Affirm, as well as some credit card companies. In the coming year, big banks may come out with BNPL options of their own, says Ruby Walia, senior advisor for digital banking at digital consulting firm Mobiquity.
“Banks don’t really want to give up business to the fintech players,” he says. “If they can offer their own bank-branded BNPL service to customers, they will at some point do that.”
Banks may offer a co-branded BNPL service with a retailer, similar to the co-branded credit cards some already have, he says. Or they could copy credit cards’ take on BNPL and let customers split debit card purchases into smaller payments after the purchase.
Competition likely for popular paycheck advances
Businesses partner with companies like DailyPay to let workers dip into their expected earnings early. Consumers can also download a cash advance app like Earnin or Dave that reviews your bank account or tracks your hours worked to determine how much you’re paid and when, so you can access part of that amount and repay it on your next payday.
Some of the country’s largest employers — Target, Walmart and Amazon included — already offer employer-based paycheck advances.
In 2020, workers used a paycheck advance service almost 56 million times to access a total of $9.5 billion, according to a study from research and advisory firm Aite-Novarica Group. That’s up from 37.2 million uses totaling $6.3 billion in 2019.
Where there’s demand, competition follows. Innovation is expected in the ever-changing financial technology industry, says Brian Tate, CEO and president of the Innovative Payments Association, which advocates for the electronic payments sector. 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’s more competition, more providers, and I think that’s a benefit to the customer.”
Regulations on the horizon
Lawmakers and regulators have considered what rules should govern BNPL and paycheck advance companies in recent years. In November, the House Committee on Financial Services held a hearing on emerging fintech companies to discuss the benefits and drawbacks of both types of financing.
Consumer advocates say BNPL companies and cash advance services provide credit and should have the same consumer protections as credit card issuers and personal loan lenders.
“Our view has always been for both of these products that these are loans. Someone is loaning you money and you’re paying it back at a later date,” says Rachel Gittleman, financial services outreach manager with Consumer Federation of America, a consumer advocacy group.
But advocates for new financial products say that too many regulations could stifle innovation.
“No matter what product you’re talking about, these are new products,” Tate says. “They’re not the same products in concept that people may be familiar with.”
Paycheck advances may not have regulators’ attention right now, but they could in the coming years, he says.
The Consumer Financial Protection Bureau issued an advisory opinion in 2020 that some advances offered through an employer aren’t 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 the new CFPB director, consumer groups sent a letter urging him to rescind the opinion.
How to approach these financing options
A lack of regulations and a flood of new products means it’s on the consumer to research, compare options and plan before using a new financial product.
Here are a few tips to keep you on track when you try out a new type of financing:
Do your research. No two BNPL companies or paycheck advance services have the same fees or terms, so read about the company to understand the pros and cons, says Illinois-based certified financial planner Maggie Klokkenga.
Know your budget. Whether you’re adding a few small installment loans or taking some of your paycheck early, it’ll affect your budget. Knowing when you have to repay and how much will be there at the time can help you avoid overdrawing.
Track your usage. New services like BNPL and paycheck advances can be used safely if you’re expecting the repayment. Keep track of how many BNPL services you use, or how many outstanding advances you have, to prevent missed payments and late fees.