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The Consumer Financial Protection Bureau (CFPB) issued a series of orders to five companies offering “buy now, pay later” (BNPL) credit. Orders to collect information on the risks and rewards of these fast-growing loans went to Affirm (NASDAQ: AFRM), Afterpay (NYSE: SQ), Klarna, PayPal (NASDAQ: PYPL) and Zip. The CFPB is concerned about the accumulation of debt, regulatory arbitrage and data collection in a consumer credit market that is already changing rapidly with technology.
“Buy now, pay later is the new version of the old layaway plan, but with modern and faster turns in which the consumer gets the product immediately but also takes on debt immediately,” said CFPB Director Rohit Chopra . “We have directed Affirm, Afterpay, Klarna, PayPal and Zip to submit information so that we can inform the public about industry practices and risks.”
The Buy Now, Pay Later credit is a type of deferred payment option that generally allows the consumer to break a purchase into smaller installments, usually four or less, often with a 25 percent down payment at checkout. The application process is quick, involves relatively little consumer information, and the product is often of no interest. Lenders have touted BNPL as a safer alternative to credit card debt, along with its ability to serve consumers with poor or high-risk credit histories.
Merchants are embracing BNPL programs and are willing to pay typically 3 to 6 percent of the purchase price to businesses, similar to credit card interchange fees, because consumers often buy more and spend more with BNPL. . In fact, BNPL usage has skyrocketed during the COVID-19 pandemic and during the holiday shopping season. More and more Americans are using it, and the most recent Black Friday and Cyber Monday shopping weekend saw massive growth at BNPL. This explosive growth has caught the attention of many investors, including significant venture capital. Big tech companies are also entering the scene.
The law requires the CFPB to monitor consumer financial markets and allows the agency to require market players to submit information to inform this monitoring. The CFPB hopes to publish aggregated findings on the knowledge gained from this research. Today’s orders seek to illuminate the range of these consumer credit products and their underlying business practices. Specifically, the Office is concerned about:
- Accumulated Debt: While old-style installment loans were generally used for occasional large purchases, people can quickly become regular BNPL users for daily discretionary purchases, especially by downloading the easy-to-use apps or installing the plugins from the Web navigator. . If a consumer has multiple purchases at multiple times with multiple companies, it can be difficult to keep track of when payments are scheduled. And when there is not enough money in a consumer’s bank account, this can result in charges from both the consumer’s bank and the BNPL provider. Due to the ease of obtaining these loans, consumers may end up spending more than expected.
- Regulatory arbitration: Some BNPL companies may not be adequately evaluating the consumer protection laws that apply to their products. For example, some BNPL products do not provide certain disclosures, which may be required by some laws. And while the BNPL app may look like a standard credit card payment, the protections that apply to credit cards may not apply to BNPL products. Many BNPL companies do not provide dispute resolution protections available to users of other forms of credit, such as credit cards. And finally, depending on the rules the lender follows, different policies and late fees apply.
- Data collection: BNPL lenders have access to the valuable payment histories of their clients. Some have used this collected data to build closed-loop shopping applications with partner merchants, pushing specific brands and products, often targeting younger audiences. As competitive forces push down the trade discount, lenders will need to find other sources of income to maintain growth and profitability. The Office would like to better understand the practices around data collection, behavioral targeting, data monetization, and the risks they can create for consumers.
The BNPL product has seen international growth and many other countries are also taking a close look at their suppliers. As part of today’s investigation, the Office is working with its international partners in Australia, Sweden, Germany and the United Kingdom, specifically the Financial Conduct Authority. The Office will also coordinate with the rest of the Federal Reserve System, as well as its state partners.