CFPB Opens Inquiry Into BNPL

Dec 29, 2021Federal Regulation, News

The Consumer Financial Protection Bureau (CFPB) recently issued a series of orders to assess the risks and benefits of “buy now, pay later” (BNPL) credit to five major companies offering the service: Affirm, Afterpay, Klarna, PayPal, and Zip. The Bureau expressed concerns about accumulating debt, regulatory arbitrage, and data harvesting in the consumer credit market.

“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 Rohit Chopra, CFPB Director. The companies were ordered to submit information so that the CFPB “can report to the public about industry practices and risks.”

The BNPL application process involves little information from the consumer and does not typically have interest. Companies are usually willing to pay 3 to 6 percent of the purchase price because consumers often spend more with BNPL, especially during the pandemic and the holiday season. According to American Banker, the BNPL industry rose to $100 billion in loans worldwide throughout the last few years.

The CFPB is concerned about the ease of accumulating debt with BNPL, as consumers can quickly become avid BNPL users for everyday spending, resulting in multiple purchases on multiple payment schedules. If there is not enough money in their bank account, they could potentially be charged by both their bank and the BNPL provider.

Regulatory arbitrage is another concern, as some BNPL products do not provide certain disclosures that are required by law. Though the BNPL application looks similar to credit card checkouts, most BNPL products do not have the same protections that apply to credit cards, like dispute resolution.

Additionally, the Bureau expressed concern about data harvesting because BNPL lenders have access to consumers’ payment histories and often use them to push certain brands and products, typically geared toward a younger demographic. The CFPB hopes to understand BNPL lenders’ practices around data collection, behavioral targeting, and data monetization.

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