BNPL and the Illogical Argument for Credit Card Interchange Fee Regulation

Merchants are urging regulators to extend Durbin Amendment provisions to credit cards, but they are in fact threading a very narrow needle. When a shiny new object comes along like “buy now, pay later,” or BNPL, merchants will gladly pay significantly higher transaction fees than they do for credit cards. But this recent surge in BNPL adoption by merchants deflates their arguments that interchange—the fees for accepting card payments—harms them.

BNPL plans are unsecured consumer credit loans offered at the point of sale. Merchants have been enticed to offer BNPL with promises of increased sales and ticket sizes, new and repeat business, or reduced basket abandonment—the very same proven advantages delivered by credit cards. Similar to credit cards, BNPL loans allow consumers to pay for purchases across multiple payments, but BNPL comes at a high cost to the merchant—and often to the consumer.

BNPL transaction fees cost merchants between 4 and 6 percent and can run as high as 8 percent, and in some cases they include an additional per-transaction fee of 30 cents. On the other hand, credit card interchange typically averages half the cost of a BNPL transaction. Credit cards users enjoy an array of consumer protections and incentives that are not available through BNPL, including rewards, ease of chargebacks and returns, and, in some cases, zero liability in the case of fraud.

Merchants have conveniently ignored the fact that BNPL loans have a negative effect on consumer protections. More than half of shoppers have made a purchase with BNPL they couldn't pay off. Four in 10 Americans who’ve taken out a BNPL loan have made a late payment, and 72 percent of those said their credit score declined. Late fees on BNPL can run as high as 25 percent of the transaction value.

With BNPL lenders often not required to evaluate the consumer’s ability to repay before issuing financing, the Consumer Financial Protection Bureau is analyzing the potential for BNPL to be used for data harvesting and as a contributor to higher consumer debt, among other concerns. The agency has warned that BNPL loans can cause overdraft fees if customers don’t have enough money in their accounts to service the payments.

The Public Interest Research Group recently articulated this problem in a letter to CFPB Director Rohit Chopra, saying “these products can lead consumers into taking on unmanageable amounts of debt and lack the same dispute or refund rights that credit cards have should a consumer be unsatisfied with their purchase.”

The argument that credit card interchange results in higher costs is illogical and disingenuous when merchants are actively promoting other forms of more expensive unsecured personal credit while simultaneously decreasing consumer protections.