CFPB Study Outlines Need for "Buy Now, Pay Later" Rules

CFPB Study Outlines Need for “Buy Now, Pay Later” Rules

The Consumer Financial Protection Bureau (CFPB) is preparing to apply the same kind of strict protections it gives credit card companies in the “Buy Now, Pay Later” (BNPL) industry, following the publication of a recent study on the practice. Officials said their findings revealed a sprawling industry that not only had few protections for consumers and helped normalize debt, but had also begun monetization and data collection efforts with little oversight.

“Buy now, pay later is a fast-growing type of loan that serves as a close substitute for credit cards,” CFPB Director Rohit Chopra said last Thursday. “We will work to ensure that borrowers have similar protections, regardless of whether they use a credit card or a Buy Now, Pay Later loan.”

key takeaways

  • Buy Now, Pay Later is an interest-free payment option that primarily helps pay for goods and services online.
  • Option grew substantially 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 study of the Buy Now, Pay Later industry revealed that consumer protections are lax and lenders often use data collection to build a database of valuable personal information.
  • The Consumer Financial Protection Bureau is establishing rules and guidelines to protect consumers from potential dangers like rampant data collection.

Buy now pay later is a booming industry

With such a huge focus on online retailing in recent years, some companies and lenders have started to push their BNPL products. Whether it’s called “pay in four,” “split pay,” or BNPL, the concept is the same: These were interest-free point-of-sale installment loans that allowed consumers to pay for purchases over time. In most cases, a down payment is required with plans that typically cap around $1,000. Any late or missing payment would result in an additional charge.

According to the CFPB report, the popularity of BNPL grew so fast that the top five lenders – Affirm, Afterpay, Klarna, PayPal and Zip – were responsible for 180 million loan originations totaling $24.2 billion in 2021. Those figures dwarfed the data for 2019, which saw those same lenders originate 16.8 million loans valued at $2 billion in 2019.

Consumers face some risk with Buy Now, Pay Later

While non-interest payments and staggered payment plans may be attractive to most consumers, CFPB researchers found that BNPL loans were associated with some potentially damaging risks.

  • Lack of standardized consumer protections. The CFPB’s primary concern is the apparent lack of consistent oversight and consumer protection. As lenders are operating outside the confines of credit card regulation, some consumers may be vulnerable to things like “lack of standardized cost of credit disclosures, minimal dispute resolution rights, a forced automatic payment option and companies assessing multiple late fees on the same missed payment.
  • Younger access to debt. The researchers found that among users of the top five lenders, the average borrower looking to use BNPL tended to be younger. According to the data, younger millennials (25-33 years old) were the largest cohort, with older millennials (34-40 years old) and Gen Z (18-24 years old) ranking second and third.
  • Normalize the debt. By indebting the youngest before, there is a risk of normalizing the accumulation of debt without proper management. The ease of obtaining a BNPL loan is highlighted by the fact that loan approval ratings increased from 69% in 2020 to 73% in 2021 and the prevalence of late fees increased from 7.8% to 10.5 % at the same time.
  • Lenders have started to move into collecting and selling user data. Although BNPL plans have grown in popularity, researchers found that profit margins have started to shrink, falling from 1.27% in 2020 to 1.01% of the total loan amount originated. With yields on the decline, the CFPB said they learned that some lenders were creating a “valuable digital profile of each user’s preferences and purchasing behavior” by switching to proprietary apps.

How the CFPB is responding

Even though BNPL providers are under the control of some state and federal supervision, the CFPB is using its power over credit providers and “has authority to supervise any covered non-depositary person, such as a Buy Now provider.” , pay later, 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 They will be subject to regular inspections. When it comes to the risk of borrowers taking too much on BNPL loans, the bureau will look at how lenders can begin to follow accurate credit reporting practices. On the subject of data collection, the CFPB will find and list data collection practices that lenders should avoid.

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