CFPB looks to regulate buy now, pay later for businesses
The Consumer Financial Protection Bureau (CFPB) said it plans to start regulating Buy Now, Pay Later (BNPL) companies over concerns that fast-growing financing products are hurting consumers.
The agency said in a September report that the CFPB, which does not currently oversee BNPL providers, plans to issue guidelines or rules that would bring the sector in line with standards already set by Congress for credit cards. As part of this review, the agency will also ensure that BNPL lenders, just like credit card companies, undergo proper supervisory examinations.
As interest in the financial product increases, ask for it too More regulations. last decemberCFPB Director Rohit Chopra requested information on industry practices and risks from Affirm, Afterpay, Klarna, PayPal and Zip, all of which are BNPL companies. The latest report is the culmination of the findings of this RFI.
“Buy now, pay later is a fast-growing type of loan and serves as a close alternative to credit cards,” Chopra said in a statement. “We will work to ensure that borrowers receive similar protection, regardless of whether they are using a credit card or a Buy Now Pay Later loan.”
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The CFPB report identifies areas of potential consumer harm
The CFPB report cited several areas in the BNPL space that it categorized as “potential risks to consumers.” One of these key areas was consumer privacy and data protection.
The Canadian Consumer Protection Bureau (CFPB) said collecting data and monetizing that data puts “consumers’ privacy, security and independence” at risk.
Chopra also said that the agency is concerned that as the big technology players enter the space, it could boost market power, thus reducing long-term innovation, selection and price competition in the industry. It also gives these larger players access to a massive amount of consumer data.
“In the United States, we generally had a separation between banking and commerce,” Chopra said. “But with the adoption of Big Tech-style business practices in payments and financial services, this chapter is going out the door.”
Chopra also raised the flag on these issues afterwards Apple announced its BNPL producer, Apple Pay Later, earlier this year.
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CFPB says BNPL borrowers may struggle to repay debt
BNPL providers partner with retailers to allow shoppers the ability to split the cost of their online purchases into multiple installments at checkout. Part of the appeal is that repayment installments, which usually start within a few weeks of purchase, with no interest. However, missed payments can result in late fees and other penalties.
BNPLs usually do not report to credit bureaus, which makes them a relatively accessible option for consumers. The French central bank fears that easy access to this financing product could put consumers at risk of over-expanding quickly and could push them into more debt.
Consumer approval of BNPL financing grew to 73% in 2021, up from 69% in 2020, and consumers increasingly sought the financing option to pay for routine expenses such as groceries and utilities, according to the CFPB.
But the agency said metrics on loan performance showed that BNPL borrowers may struggle to meet their debt obligations. More than 10% of borrowers charged at least one late fee in 2021, compared to 7.9% in 2020. The industry discount rate, or uncollectible loan rate, jumped to 2.39% in 2021, up from 1.83% in 2020.
Bob Bellbrook, CEO of Captjur, said that increased regulation of the industry will likely not dampen the appetite for BNPL programs because demand is high, particularly among millennials born between 1981 and 1996 and generation Z consumers.
“The ugly downside of this, in my opinion, is that, in a recession, the overdue debt that these programs will create within the consumer-based economy can have crippling effects down the road,” Billbrook said. “BNPL could be the financial weapon of mass destruction that actually wipes out vertical consumer credit and companies that choose to support these programs can be significantly affected.”
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