The country’s consumer watchdog plans to start regulating the burgeoning ‘buy now, pay later’ industry, raising concerns about potential abuse, data mining and consumers being pushed to overreach .
The Consumer Financial Protection Bureau plans to issue guidelines or a rule to establish industry standards similar to those currently governing credit card companies.
The plans were announced at the same time as the bureau released a report earlier this month highlighting industry trends and the bureau’s concerns.
“Buy now, pay later” programs took off online during the COVID-19 pandemic, when more consumers were pushed to purchase goods and services virtually. They offer consumers short-term loans ranging from around $50 to $1,000 to buy something and pay it back in four interest-free installments over about six weeks.
Some of the big players in the industry include Affirm, Afterpay, Klarna, Paypal and Zip. These five companies issued 180 million loans worth around $24 billion in 2021, nearly 10 times the amount they did in 2019, according to the CFPB.
Companies make money by charging participating retailers and sellers a commission, typically 4-6% of the transaction. Retailers absorb fees as a cost to entice people to buy things they wouldn’t otherwise buy.
Most “buy now, pay later” lenders also charge late fees to borrowers if they miss a payment.
When asked to comment on the report, an Affirm spokesperson said the company provides “a safe, honest and responsible way to pay over time, with no late or hidden fees.” Although Affirm does not charge late fees, it does warn that late payments could hurt borrowers’ credit scores.
CFPB Director Rohit Chopra said the industry does not offer the same clear set of dispute resolution procedures required of credit card companies, “which creates chaos for some consumers when they return their goods or encounter other difficulties”.
The bureau also expressed concerns about the collection of data used to profile shopping habits and encourage consumers to buy more and borrow more.
“Borrowers can easily take out multiple loans in a short period of time from multiple lenders or ‘buy now, pay later’ debts can have effects on other debts,” the CFPB said.
Since most “buy now, pay later” lenders do not submit data to major credit reporting companies, “buy now, pay later” lenders and other lenders are unaware of liabilities of the borrower when making the decision to grant new loans”. said the office.
The Financial Technology Association, which represents many “buy now, pay later” lenders, noted that according to the CFPB report, the industry “imposes significantly lower direct financial costs on consumers than traditional credit products.”
“Consumers are choosing to buy now, pay later as a competitive alternative to high-interest credit products that trap them in cycles of debt,” said Penny Lee, CEO of the association. “We look forward to continuing to work with regulators like the CFPB to advance positive consumer outcomes.”