CFPB study highlights need for “Buy Now, Pay Later” rules

The Consumer Financial Protection Bureau (CFPB) is preparing to put in place the same type of strict protections that it places on credit card companies in the “Buy now, pay later” (BNPL) sector, following the publication of a recent study on the practice. Officials said their findings revealed a booming industry that not only had few safeguards for consumers and helped normalize debt, but had also begun data collection and monetization efforts with little support. surveillance.

“Buy now, pay later is a rapidly growing type of loan that is closely replacing credit cards,” CFPB Director Rohit Chopra said last Thursday. “We will work to ensure borrowers have similar protections whether they are using a credit card or a Buy Now, Pay Later loan.”

Key points to remember

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

Buy now, pay later is a booming industry

With such an emphasis on online retail in recent years, some companies and lenders have started promoting their BNPL products. Whether called “pay in four”, “split payment” or BNPL, the concept is the same: they were point-of-sale interest-free installment loans that allowed consumers to pay for their purchases over time. . In most cases, a down payment is required with plans typically capped at around $1,000. Any late or missing payment will incur additional charges.

According to the CFPB report, BNPL has grown in popularity so quickly that the top five lenders, Affirm, Afterpay, Klarna, PayPal and Zip, were responsible for 180 million loans totaling $24.2 billion in 2021. Those numbers eclipsed data from 2019, which saw these same lenders disbursed 16.8 million loans worth $2 billion in 2019.

Consumers face certain risks by buying now, paying later

Although the absence of interest payments and staggered repayment plans may be attractive to most consumers, CFPB researchers found that BNPL loans were associated with some potentially dangerous risks.

  • Lack of standardized consumer protections. The CFPB’s main concern is the apparent lack of consistent oversight and consumer protection. Because lenders operate outside the confines of credit card regulations, some consumers may find themselves vulnerable to things like a “lack of standardized cost of credit disclosures, minimal dispute resolution rights, a forced opt-in to automatic payment and businesses that assess multiple late penalties on the same missed payment.”
  • Younger access to debt. The researchers found that among the top five lender users, the average borrower who sought to use BNPL tended to be younger. According to the data, young millennials (25-33 years old) made up the largest cohort, with older generations (34-40 years old) and Gen Z (18-24 years old) taking second and third place.
  • Normalizes debt. By getting young people into debt earlier, this risks normalizing the accumulation of debt without proper management. The ease of getting a BNPL loan is evidenced by the fact that loan approval rates have increased from 69% in 2020 to 73% in 2021 and the prevalence of late fees has increased from 7, 8% to 10.5% over the same period.
  • Lenders have started turning to collecting and selling user data. Even as BNPL plans have grown in popularity, researchers found that profit margins had started to shrink, from 1.27% in 2020 to 1.01% of the total loan amount issued. With yields falling, the CFPB said it learned that some lenders were building a “valuable digital profile of each user’s shopping preferences and behavior” by turning to proprietary apps.

How the CFPB reacts

Even though BNPL providers fall under the jurisdiction of some state and federal oversight, the CFPB uses its power over credit providers and “has the power to supervise any non-custodial covered person, such as a Buy Now, Pay Later provider. , in certain circumstances .”

To that end, the CFPB said it will begin to identify areas where it can provide guidance and establish rules to ensure that BNPL lenders “adhere to many of the basic protections that Congress has already established for credit cards” and will be subject to regular inspections. Regarding the risk of borrowers taking on too many BNPL loans, the office will consider how lenders can begin to follow accurate credit reporting practices. Regarding the issue of data collection, the CFPB will find and call out data collection practices that lenders should avoid.

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