CFPB study outlines the need for “buy now, pay later” rules


The Consumer Financial Protection Bureau (CFPB) is preparing to apply the same kind of strict protections it imposes on credit card companies in the Buy Now, Pay Later (BNPL) industry, after a recent study on the practice was released . Officials said their findings showed an exploding industry that not only had few consumer guardrails and was helping to normalize debt, but had also begun data collection and monetization efforts with little oversight.

“Buy now, pay later is a fast-growing type of loan that serves as a close substitute for credit cards,” CFPB director Rohit Chopra said last Thursday. “We will work to ensure that borrowers enjoy similar protections whether they are using a credit card or a Buy It Now Pay Later loan.”

The central theses

  • Buy Now, Pay Later is an interest-free payment option primarily used to pay for online goods and services.
  • The option has grown significantly during the pandemic, with Affirm, Afterpay, Klarna, PayPal and Zip issuing 180 million Buy Now, Pay Later loans totaling more than $24 billion in the past year alone.
  • A study of the buy-now, pay-later industry found that consumer protection is lax and lenders often collect data to build a database of valuable personal information.
  • The Consumer Financial Protection Bureau creates rules and guidelines to protect consumers from potential dangers such as rampant data collection.

Buy now, pay later is a booming industry

With such a large focus on online retail in recent years, some companies and lenders have started to push their BNPL products. Whether called “pay-in-four,” “split pay,” or BNPL, the concept is the same – they were interest-free installment loans at the point of sale that consumers could use to pay for their purchases over time. A deposit is required in most cases, with plans typically capped at around $1,000. Any late or missing payment would result in an additional charge.

According to the CFPB report, BNPL grew in popularity so quickly that the top five lenders, Affirm, Afterpay, Klarna, PayPal and Zip, were responsible for 180 million loan originations totaling $24.2 billion in 2021. Those numbers dwarfed 2019 data. The same lenders originated 16.8 million loans worth $2 billion in 2019.

Consumers are at risk with “buy now, pay later”.

While the lack of interest payments and staggered repayment schedules may be attractive to most consumers, CFPB researchers found that BNPL loans came with some potentially harmful risks.

  • Lack of standardized consumer protection. The CFPB’s biggest concern is the apparent lack of consistent oversight and consumer protection. With lenders operating outside the confines of credit card regulation, some consumers could find themselves vulnerable to things like a “lack of standardized disclosures of credit cost, minimal rights to dispute resolution, an enforced opt-in for automatic payment, and companies evaluating multiple late fees.” for the same missed payment.”
  • Younger access to debt. The researchers found that among the top five lender users, the average borrower looking to use BNPL tended to be on the younger side. According to the data, younger Millennials (25-33 years old) were the largest cohort, while older Millennials (34-40 years old) and Gen Z (18-24 years old) came in second and third.
  • Normalizes debt. By getting younger people into debt earlier, there is a risk that debt will normalize without proper management. The ease of obtaining a BNPL loan is underscored by the fact that loan approval rates have increased from 69% in 2020 to 73% in 2021 and that over the same period the prevalence of late fee has increased from 7.8% to 10, has increased by 5%.
  • Lenders have started to switch to collecting and selling user data. Although BNPL plans are growing in popularity, researchers found that profit margins began to shrink, increasing from 1.27% in 2020 to 1.01% of the total loan amount made. With yields falling, the CFPB said they learned that some lenders were creating a “valuable digital profile of each user’s shopping preferences and behavior” by switching to proprietary apps.

How the CFPB is reacting

Although BNPL providers fall under the purview of some state and federal regulators, the CFPB exercises its powers over loan providers and “has the power to supervise, in certain circumstances, any person who is not covered by deposits, such as .”

To that end, the CFPB said it will begin to identify areas where it can provide guidance and establish rules to ensure BNPL lenders “comply with many of the basic safeguards that Congress has already established for credit cards,” and be subject to regular inspections. When it comes to the risk of borrowers taking too many BNPL loans, the bureau will look at how lenders can start complying with accurate credit reporting practices. Regarding the data collection issue, the CFPB will identify and identify the data collection practices that lenders should avoid.

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