Business Tips

A guide to responsible lending

Last updated June 2022

Buy now, pay later payment solutions are designed to give customers more freedom, control and flexibility over the way they shop online. But, as with any financial decision, there are important things to consider before choosing to pay through installments or placing a BNPL provider at your checkout.

And not all buy now, pay later solutions are created equally. 

Splitit’s installments-as-a-service model promotes responsible lending by empowering people to use their existing credit card to shop in a way that fits their budget and personal circumstances. It’s about providing shoppers with access to a new payment solution without the need for an additional line of credit or the risk of late fees and penalties. 

Here, we look at common questions and challenges surrounding buy now, pay later providers. Whether you’re shopping or selling, read on to learn about how to use installments and BNPL to support responsible lending. 

What is buy now, pay later?

Also referred to as ‘installments’ or ‘BNPL’, buy now, pay later is exactly what it sounds like – instead of paying the entire cost upfront, customers get their items first and then pay for their purchase in installments over a set period of time. 

There are many different ways that installment payments are structured. Some of the most common are:

  • Pay-in-4 model: Customers pay for their purchase over 4 interest-free payments every 2-weeks
  • Credit-based model: Similar to a credit card, customers take out a new line of credit to borrow the full amount of the purchase from the BNPL provider and pay it back on a monthly basis, with interest
  • Splitit’s existing card-based model: Customers leverage the available balance on their credit card to make monthly repayments

What is responsible lending?

Responsible lending is about providing a financial service that caters to the best interests of the customer. 

The details of how this works in practice vary depending on the financial product (such as a credit card, bank loan, mortgage, BNPL platform, etc.) and the circumstances of the borrower. However, there are a few key elements that responsible lenders should always prioritize:

  • Affordability: Ensuring that customers aren’t being misled into agreements they cannot afford to repay.
  • Transparency: Ensuring that the terms and conditions of the financial agreement are clear, easy to follow, and all information is disclosed upfront.
  • Support: Ensuring that customers can access support if they have questions or concerns surrounding repayment.

The Consumer Financial Protection Bureau works to uphold these values by monitoring lenders and businesses, enforcing Federal consumer financial law, and providing Americans with resources to help them make responsible financial decisions. 

As well as consumer education, the CFPB implements rules and policies to ensure that financial products are fair and transparent for consumers.

BNPL and responsible lending

The concept of buy now, pay later has been around since the very first stores opened their doors, but it’s relatively new within the e-commerce space – and it’s growing at a rapid pace. 

The CFPB reports that 42% of Americans have used a BNPL solution at least once, with 8.42 million transactions in December 2021 alone. As consumers and businesses continue to embrace buy now, pay later platforms, it becomes increasingly important to ensure that responsible lending is at the forefront of the industry. 

There are several elements that factor into responsible lending for BNPL platforms, depending on the provider and the structure of the platform. Recommendations from the Center for Responsible Lending surrounding credit-based or ‘pay in 4’ BNPL platforms include:

  • Responsible underwriting: BNPL providers should have vetting processes in place that ensures affordability is being assessed before customers are offered a loan product.
  • Transparency of terms: Providers must make it clear if there are fees attached to the BNPL agreement or penalties involved for late repayment.
  • Debt collection: There should be clear communication about what happens if a customer fails to meet the repayment terms.
  • Credit reporting: BNPL platforms that run on a credit-based model need to be upfront about how the application and repayment process affects the customer’s credit score.
  • Data collection: Providers should make it very clear if they are collecting and redistributing customer data for marketing and retargeting purposes. 
  • Repayment terms: Providers should make it easy for customers to track their repayment schedule and know when they have payments due.

Many of these factors are tied to the loan format that credit-based BNPL providers operate under, which are being watched by the CRL and CFPB. 

We can’t speak on behalf of the other guys – but, as you know, at Splitit we do things differently, and responsible lending is at the core of the way our installments-as-a-service platform is structured. 

Splitit and responsible lending

Splitit is all about providing people with control over the way they shop and manage their budget. 

Other BNPL providers don’t have visibility of what each provider is lending to their customers , which means customers may be applying for lending agreements from multiple platforms at one time and potentially borrowing more than they’re able to repay. With Splitit, limits are already set by customers’ existing credit card. Customers are not able to borrow more than their credit card allows, plus all their transactions are on one statement.

Our existing card-based model means that customers can pay for their purchase in installments using their current credit card. There’s no need to take out an extra line of credit – it’s all about empowering them to use the financial tools they already have in a new and flexible way. 

We adhere to responsible lending practices at every stage of the customer journey, and we support our business partners with the tools and knowledge they need to carry this through to their audience. 

For us, this is what that looks like across the pillars of responsible lending:

  • Responsible underwriting: Splitit is only compatible with a customer’s existing credit card, which means their affordability has already been assessed and verified by their credit card provider. They must have the full amount available on their card at the time of purchase, which means they can’t use Splitit to spend over their credit card limit.  
  • Transparency of terms: Splitit doesn’t charge the customer any usage fees or late repayment penalties – if they miss a payment, we’ll process the pre-authorized hold that’s already on their card for the full remaining transaction value. 
  • Debt collection: In the case of missed or defaulted payments, Splitit doesn’t conduct any debt collection – if there’s an issue with the payments, the customer’s credit card provider will be in touch with them. In some instances, we may be asked to provide information to the card provider. 
  • Credit reporting: As Splitit is only compatible with an existing credit card, there is no credit check needed. The only way a customer’s credit score will be impacted is if they don’t adhere to the repayment terms they’ve already agreed with their credit card provider.
  • Data collection: Your data is safe with us – Splitit will never sell or use customer information or transaction history for marketing purposes.  
  • Repayment terms: Splitit makes it easy for customers to keep track of their payment schedule within the Shopper Portal.

If customers have questions or concerns at any stage of their shopping or repayment journey, Splitit also offers 24/7 customer support

As buy now, pay later becomes an increasingly popular option for shoppers and retailers, we’re committed to putting consumers’ financial health at the forefront of everything we do. 

The whole reason Splitit exists is to empower responsible credit card users to spend in a way that makes sense to them. As we rise and grow to meet the demand for BNPL solutions, we’ll continue to empower shoppers to purchase the things they want within a transparent and flexible framework. 

Learn more about how Splitit’s installments-as-a-service platform can provide your customers with a new level of control over their BNPL options. 

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