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The Consumer Financial Protection Bureau (CFPB) issued a series of orders to five companies offering “buy now, pay later” (BNPL) credits. Orders for collecting 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 debt accumulation, regulatory arbitrage and data collection in a consumer credit market that is already evolving rapidly with technology.
“Buy now, pay later is the new take on the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but also gets the debt immediately,” said Rohit Chopra, Managing Director of the CFPB. “We have directed Affirm, Afterpay, Klarna, PayPal and Zip to submit information so that we can report to the public on industry practices and risks.”
Buy Now, Pay Later credit is a type of deferred payment option that typically allows a consumer to split a purchase into installments, typically four or less, often with a 25% down payment due at checkout. The application process is fast, involving relatively little information from the consumer, and the product is often delivered without interest. Lenders have touted BNPL as a safer alternative to credit card debt, as well as its ability to serve consumers with limited or at-risk credit histories.
Merchants are embracing BNPL programs and are typically willing to pay businesses 3-6% of the purchase price, such as credit card interchange fees, as consumers often buy more and spend more with BNPL. Indeed, BNPL use has increased during the COVID-19 pandemic and throughout the holiday shopping season. More and more Americans are using it, and the last shopping weekend of Black Friday and Cyber Monday saw massive growth at BNPL. This explosive growth has caught the attention of many investors, including large venture capitalists. Big tech companies are also entering the arena.
The law requires the CFPB to monitor consumer financial markets and allows the agency to require market participants to submit information to inform such monitoring. The CFPB plans to publish aggregated conclusions on the lessons learned from this survey. Today’s orders seek to illuminate the range of these consumer credit products and their underlying business practices. More specifically, the Bureau is concerned about:
- Debt build-up: While old layaway installment loans were typically used for occasional large purchases, people can quickly become regular BNPL users for daily discretionary purchases, especially if they download the easy-to-use apps. use or install web browser plug-ins. . If a consumer makes multiple purchases across multiple calendars from multiple businesses, it can be difficult to know when payments are scheduled. And when there is not enough money in a consumer’s bank account, it can potentially result in charges to 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 adequately assess the consumer protection laws that apply to their products. For example, some BNPL products do not provide certain information, which may be required by certain laws. And while the BNPL app may look like a standard checkout with a credit card, the protections that apply to credit cards may not apply to BNPL products. Many BNPL companies do not offer dispute resolution protections to users of other forms of credit, such as credit cards. And finally, depending on the rules followed by the lender, different late fees and policies apply.
- Data Collection: BNPL’s lenders have access to their clients’ valuable payment histories. Some have used this collected data to create closed-loop shopping apps with partner merchants, pushing specific brands and products, often aimed at a younger audience. As competitive forces put pressure on merchants’ rebates, lenders will need to find other sources of income to maintain their growth and profitability. The Bureau would like to better understand the practices surrounding data collection, behavioral targeting, data monetization and the risks they can create for consumers.
The BNPL product has experienced international growth and many other countries are also looking closely at its suppliers. As part of today’s investigation, the Bureau is working with its international partners in Australia, Sweden, Germany and the UK, in particular the Financial Conduct Authority. The Office will also coordinate with the rest of the Federal Reserve system, as well as with its state partners.