Apple Pay Is Addicted to Awful Lending Services

Alright, Klarna is the latest addition to Apple Pay's Buy-Now-Pay-Later (BNPL) portfolio. If you want to take out a 0% interest loan to buy a new pair of shoes, or whatever, just select Klarna or one of the other BNPL services that are built into Apple Pay's checkout screen. Bleh.

We attacked Apple's Pay Later service when it launched a few years ago. I foamed at the mouth when Apple began integrating third-party BNPL services with Apple Pay, and I felt kinda woozy when Apple killed its Pay Later service—Pay Later was sacrificed to attract more third-party lenders, weirdly.

For those who are out of the loop, Buy-Now-Pay-Later (BNPL) services are just short-term loans with a 0% interest rate and minimal credit checks. At most, they perform a soft inquiry, which is rarely marked on your credit report. BNPL services are extremely accessible to people of all income levels and creditworthiness, and they can be extremely attractive to people who lack financial literacy.

When people criticize BNPL services, it usually comes down to things like "these services encourage overspending" or "these services drag young people into debt." Survey data says that both of these claims are true. However, there are plenty of people who use BNPL services without destroying their financial future.

"BNPL lenders may be designing their loans to attempt to evade federal and state consumer protection and credit laws and may not adequately disclose lending and repayment terms. For instance, BNPL providers may not necessarily consider a borrower’s ability to repay loans before approving applications." - Office of the U.S. Attorney General

We can agree that soft credit inquiries and a 0% interest rate "lure" vulnerable people, but we can also agree that personal responsibility is important. So, let's set aside the overspending conversation and focus elsewhere. BNPL services are not bound by the same rules and regulations as credit cards or other conventional forms of lending. They are not required to report loans to credit bureaus, and they are not required to perform hard credit inquiries. In effect, they operate on the brink of our lending system. They undermine the Truth in Lending Act and make it harder for other lenders to assess a borrower's creditworthiness.

Let's say that I take out a BNPL loan to buy a $1,500 TV. I don't make any of my payments, yet I ask for another loan from the same service—they deny me, as they should, because I'm clearly doing something wrong. Other lenders don't have access to this information because it doesn't show up on my credit report. If I apply for a credit card, a mortgage, or a different BNPL service, the lender may assume that everything is cool. They may give me a loan that I can't possibly repay. On a large scale, this is something that could seriously damage the economy. Encouraging the use of BNPL services through Apple Pay, or any other payments platform, is irresponsible.

The U.S. Attorney General has compared BNPL services to predatory lending, citing the high potential for debt, the lack of proper credit checks, and the lack of coordination with credit bureaus. These are known problems that plenty of very smart people are concerned about.

Thankfully, it's not all doom and gloom. The Consumer Financial Protection Bureau (CFPB) recently decided that BNPL services should be treated as credit card lenders. They still enjoy too much freedom, but they must provide basic consumer protections like charge disputes and refunds on returned products. The federal government wants BNPL loans to appear on credit reports, and some services are complying with this request. There's also a lot of talk about how BNPL loans should be represented on credit reports. Loans that open and close within a matter of weeks tend to have a negative impact on credit scores—this shouldn't be the case for BNPL loans.

Apple Pay Klarna integration was announced in an open letter celebrating Apple Pay's 10th birthday. It's an interesting read. Jennifer Bailey, the VP of Apple Pay and Wallet, describes how Apple Pay makes a "positive" and "meaningful impact on the financial health and lives of [Apple] customers" before moving on to talk about new and upcoming features. While I agree that Apple Pay has made life more convenient, this push for BNPL services just doesn't sit well with me.

Source: Apple