[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]


                   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
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                              __________

                    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. VELAZQUEZ, 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
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts

                   Charla Ouertatani, Staff Director
                   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
                           
                           
                           C O N T E N T S

                              ----------                              
                                                                   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 Institution..........................................     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

 
                        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, 
Sessions, 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 Services Committee who are not members of the task 
force are authorized to participate in today's hearing.
    Today's hearing is entitled, ``Buy Now, Pay More Later? 
Investigating Risks and Benefits of BNPL and Other Emerging 
Fintech Cash Flow Products.''
    I now recognize myself for 4 minutes to give an opening 
statement.
    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 overdraft 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.
    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 research 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 creditworthiness.
    The lack of consumer disclosure has also raised concerns. 
The Pay in 4 business model, which typically offers customers 
the option 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 employee paychecks. 
Similar direct-to-consumer overdraft avoidance companies 
establish direct connections with consumers' bank accounts to 
monitor cash flow. Companies then offer consumers advances 
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 additional 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 whether a tip influences a 
consumer's likelihood of being offered an advance.
    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 Financial 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 Bureau (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 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 
member 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 
products 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 becoming 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 overly 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 economy. 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 
migrate 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. Consumers 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 technology 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 
economy? 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 before 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? Certainly 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 regulators, 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 
consumer data as we continue to adopt these new financial 
technologies. As many probably remember, consumer data privacy 
was the prime focus of our task force's last hearing. I 
encourage my colleagues to always keep that in mind any time we 
are discussing new financial products where consumers are 
providing sensitive information. I am sure we will continue to 
discuss these topics further 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 future hearings, and I 
look forward to the discussion with our witnesses 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 Metropolitan 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 Payments Association.
    The witnesses are reminded that their oral testimony will 
be limited 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 members' time.
    And without objection, your written statements will be made 
a part of the record.
    Dr. Broady, you are now recognized to offer a 5-minute 
presentation of your testimony. Thank you.

  STATEMENT OF KRISTEN E. BROADY, FELLOW, METROPOLITAN 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-
focused 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 underserved 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 private-sector innovations can be paired with public 
policy interventions as well as address some of the systemic 
issues that have contributed to the financial health and wealth 
gap.
    Fintech companies can create inclusive financial services 
products 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 populations experience greater income 
and expense volatility. Offering accounts that do not have 
overdraft fees, minimum balance requirements, and account 
maintenance fees can help reduce the negative 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 African 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.
    They can use alternative data and machine learning to 
extend affordable credit to a larger population of consumers. 
They can provide fast, fair, and flexible small business 
lending products that do not require a personal credit score. 
We know that Black and Hispanic 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 products meet the needs of Black-owned small businesses, 
it can capitalize 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 participate in the 
digital economy. They can hire more people of color, 
particularly Black people, as we see banks leaving Black 
neighborhoods and Black people having less access to 
traditional banking products.
    They can meet people where they are in their communities 
working more intentionally with local leaders, minority 
depository institutions (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 institutions 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 
Davidson, and members of the Task Force on Financial Technology 
for the opportunity to testify before you today on innovations 
in financial 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 Association (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.
    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 transactions, 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 automation, and 
other emerging technologies, fintech companies are providing 
consumers with improved personalized services, greater 
convenience, 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 reshaping 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 revolving interest. Buy now, pay later is an 
alternative payment method that allows for small, short-term 
purchases that are typically paid in interest-free 
installments. BNPL products are structured 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 provide 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 treatment of customers, and electronic fund 
transfers. They are also subject to similar State consumer 
protection laws.
    Our members are committed to regulatory frameworks that 
safeguard consumers, and are actively engaged with financial 
regulators, such as the CFPB, in this pursuit. FTA appreciates 
the opportunity to engage with the committee today and use this 
as just the start of an ongoing dialogue. Fintech innovation, 
including 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, consumers, 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 justice 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 protection 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 affordable, 
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 multiple 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 employers 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 may be difficult to undo. When caught using one 
method of pressing tips, another will surface. All the tip 
products I just listed are balloon payment loans that 
undoubtedly lead to a cycle of re-borrowing. 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. Regulators 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 penalty 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 questions.
    [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 
presentation of your testimony.

  STATEMENT OF MARISABEL TORRES, DIRECTOR, CALIFORNIA POLICY, 
              CENTER FOR RESPONSIBLE LENDING (CRL)

    Ms. Torres. Thank you. Good morning, Chairman Lynch, 
Ranking 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. financial system. I have seen firsthand how easily people 
can be preyed upon with credit offers that may promise 
financial opportunity but that can result in financial harm. As 
a consumer advocate who has worked on policy issues around 
financial inclusion, including predatory inclusion, I know that 
my family's experience was not unique.
    Our discussion today is timely. The availability of fintech 
products 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 market 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 prevalence, 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 
financial regulator, the Department of Financial Protection and 
Innovation (DFPI), discovered that by offering these products 
to California consumers, certain buy now, pay later providers 
were making 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 licensed, 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 younger 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 
assume 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 reinforces 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.
    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 
summation 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 products, 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 encourage efficient use of 
electronic payments, cultivate financial inclusion, and empower 
consumers.
    As we have learned through the pandemic, even the best-laid 
plans cannot always protect families from unexpected financial 
disruptions. The Federal Reserve's 2018 survey of household 
economics found that 40 percent of American households would 
struggle to come up with $400 to pay for an unexpected bill. 
Many consumers have few options should they face an unexpected 
expense between paydays, and the traditional options have 
proven to be expensive. 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 
developed new services and products to help consumers meet 
these timing 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 Protection 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 credit. 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 
consumers in financial distress may consider title, payday, or 
pawn loans as options. With the average cost per EWA 
transaction ranging from $2.59 to $6.27, the report makes it 
clear that EWA is far less costly than other options. EWA has 
grown in popularity because 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 providers 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 
easily relate to a retail worker, single parent, or young adult 
facing a financial emergency and lacking easy access to short-
term liquidity. 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 interested 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 onerous 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 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 
Congress, 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 mentioned 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 
gentleman from Ohio, Mr. Davidson, for 5 minutes.
    Mr. Davidson. Thank you, Mr. Chairman. Ms. Lee, when I 
started thinking about this hearing, as I stated, buy now, pay 
later is simply the idea of extending credit. That has been 
around way before the internet. But as we think about the 
payment systems 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 innovation 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 timeframe 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 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 employee 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 
expired. I thank all of the witnesses for your testimony. I 
look forward 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 
programs 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 
exceed $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 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 
Industry 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 
minimum 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 
regulations that require a minimum age of 18 and older?
    Ms. Lee. I will confirm with our members as to if there is 
a minimum 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 depends. 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 
alternative 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--
    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 
lending 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. Traditionally, 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, because we do think that it is an ability to help 
provide good credit. When someone who is paying consistently 
for 2 weeks on a minimum 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 
savings, 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 potentially 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. 
Sessions, 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 
opportunity to hear our panel provide us their ideas.
    Mr. Tate, I would like to see if you have an opinion about 
something that has been an issue, the Earned Wage Access 
Program. Previously, we have had CFPB Directors who viewed this 
favorably, and it presumptively was a positive part of the 
ability for people 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 alternative, 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 mentioned, 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 people who are in the marketplace, to give opinions about 
the effectiveness 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.
    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 
employees 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 happened 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 expense, 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 
interesting 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 anywhere 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.
    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 paying 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 revenue 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 flexible 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 
people 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 
understand 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 payment 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.
    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 chairman 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 association 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 
bureaus, and are working with them actively so that they can 
properly 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 consumers 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 perspective is something that is 
consistently paying, on time, not incurring late fees, how that 
can be a positive aspect for how someone 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 frequency 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 overall 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 
experiencing 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 getting 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 individual to the quick payout. I often 
think of how a waiter or a waitress or a bartender has quick 
access to their cash. They can actually 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 Christmas 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 employees. It helps them manage their money. It helps 
them smooth out income volatility. I also think, at the same 
time, this is a dignity 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 footing that bill, but it would often then be the employer 
that is viewing this as value-additive to their workers in that 
structure.
    Mr. Tate. Absolutely. And in many cases, this is a popular 
benefit, 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 company that has the EWA option, and that is one 
of many factors.
    Mr. Steil. And maybe for the same reasons, some people are 
attracted 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 
concerns 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 
person. 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 Director 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 recognize 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.
    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 industry that we worked Monday through Friday, 
and then payday was the following Wednesday. In my business, 
the ironworking industry, 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 following 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 curious, is there a danger where the 
employees is not part of this conversation 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 generated, 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 consumer 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 important to know what the real 
business model is and how data is being used.
    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 
measure 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-selling 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-selling. I go to Amazon. Jeff Bezos has built a heck of a 
company because, 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 jurisdiction 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 obligations 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, 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 
capabilities, 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 something 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 operates 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 flexibility. So, 
fundamentally, they are two very, very different products, and 
should be treated as such.
    Mr. Davidson. Thank you. My time has expired, and I really 
appreciate the time given to prepare for this and the hearing.
    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 
direct 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 
assistance, 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 extension of credit under the Truth in Lending 
Act. Additionally, as many buy now, pay later products do not 
report payments, I wonder, 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 layaway 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 payments that we used to do when families wanted to buy a 
refrigerator 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 buying were way overpriced anyway--the televisions, the 
refrigerators, and all of that. And I guess now what we are 
looking at, the possibility 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 
lenders and layaway plans and things like that can be targeted 
to Black neighborhoods. We know that payday lenders are 
overrepresented in Black neighborhood, where the programs that 
you are speaking about are not targeted. They are on the 
internet. Everyone has access to them, so they are not targeted 
towards a specific population. In that way, they are not as 
predatory as payday lenders.
    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 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 targeted. 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 
locating 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 recommend 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 merchants 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 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 
research 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 
consumers.
    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 financial products?
    Ms. Lee. I would say many of the FTA's companies that I 
represent 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 organization. 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 
repayment 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 payment, that can pose a number of risks for 
consumers who don't have that money available to them, such as 
overdrafts, and nonsufficient 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 consumer 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 
underserved by the traditional financial system. Do these 
products actually affect the racial and socioeconomic 
disparities in access to financial services?
    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 
actually 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 companies have helped. I believe that they are 
helping, but I can't provide particular data at this time.
    Mr. Torres of New York. Okay. That is the extent of my 
questioning. 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 
questions for these witnesses, which they may wish to submit in 
writing. 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 extraneous 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.]

                            A P P E N D I X

                           November 2, 2021
                           
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