WASHINGTON—Five companies within the rapidly growing buy now, pay later (BNPL) market are under scrutiny from the Consumer Financial Protection Bureau.
The Bureau said it has issued a series of orders seeking to collect information on the risks and benefits of the five firms: Affirm, Afterpay, Klarna, PayPal, and Zip.
The CFPB stated it is concerned about “accumulating debt, regulatory arbitrage, and data harvesting” in a consumer credit market already quickly changing due to new technologies.
“Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too,” said CFPB Director Rohit Chopra. “We have ordered Affirm, Afterpay, Klarna, PayPal, and Zip to submit information so that we can report to the public about industry practices and risks.”
The CFPB said in making its announcement that when it comes to BNPL credit, the application process is quick, involves relatively little information from the consumer, and the product often comes with a promise of interest.
A Spike in Usage
“Lenders have touted BNPL as a safer alternative to credit card debt, along with its ability to serve consumers with scant or subprime credit histories. Merchants are adopting BNPL programs and are willing to typically pay 3% to 6% of the purchase price to the companies, similar to credit card interchange fees, because consumers often buy more and spend more with BNPL,” the CFPB said.
“Indeed, BNPL’s use has spiked during the COVID-19 pandemic and throughout 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 in BNPL. This explosive growth has caught the eye of many investors, including significant venture capital money. Big tech companies are also entering the arena,” the agency said.
The Specifics
The orders seek to illuminate the range of these consumer credit products and their underlying business practices. Specifically, the Bureau is concerned about:
- Accumulating debt: “ Whereas the old-style layaway installment loans were typically used for the occasional big purchase, people can quickly become regular users of BNPL for everyday discretionary buying, especially if they download the easy-to-use apps or install the web browser plugins. If a consumer has multiple purchases on multiple schedules with multiple companies, it may be hard to keep track of when payments are scheduled. And when there is not enough money in a consumer’s bank account, this can potentially result in charges by both the consumer’s bank and the BNPL provider. Because of the ease of getting these loans, consumers can end up spending more than anticipated,” the CFPB said.
- Regulatory arbitrage: “Some BNPL companies may not be adequately evaluating what consumer protection laws apply to their products,” the Bureau noted. “For example, some BNPL products do not provide certain disclosures, which could be required by some laws. And while the BNPL application may look similar to a standard checkout with a credit card, 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, like credit cards. And finally, depending on what rules the lender is following, different late fees and policies apply.”
- Data harvesting: “BNPL lenders have access to the valuable payment histories of their customers,” stated the CFPB. “Some have used this collected data to create closed loop shopping apps with partner merchants, pushing specific brands and products, often geared toward younger audiences. As competitive forces pressure the merchant discount, lenders will need to find other sources of revenue to maintain growth and profitability. The Bureau would like to better understand practices around data collection, behavioral targeting, data monetization and the risks they may create for consumers.”