CFPB study illustrates need for ‘buy now, pay later’ rules
The Consumer Financial Protection Bureau (CFPB) is preparing to place the same kind of strict protections it is placing on credit card companies in the “buy now, pay later” (BNPL) industry, after releasing a recent study on the practice. Officials said their findings revealed an exploding industry that not only had few consumer protection barriers and helped normalize debt, but also began data collection and monetization efforts with little oversight.
“Buy now, pay later is a fast-growing type of loan that acts as a close alternative to credit cards,” CFPB Director Rohit Chopra said last Thursday. “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.”
- Buy Now, Pay Later is an interest-free payment option that mostly helps to pay for goods and services online.
- Choice has grown exponentially during the pandemic, with Affirm, Afterpay, Klarna, PayPal and Zip creating 180 million Buy Now Pay Later loans totaling more than $24 billion in the past year alone.
- A study in Buy Now, Pay Later reveals that consumer protections are lax and that lenders often use data harvesting to build a database of valuable personal information.
- The Consumer Financial Protection Bureau sets rules and guidelines to protect consumers from potential risks such as data collection outbreaks.
Buy now, pay later is a booming industry
With so much focus on online retail in recent years, some companies and lenders have started pushing their BNPL products. Whether it’s called “Pay by Four”, “Wage Split” or BNPL, the concept is the same – these were loans on an interest-free installment basis that allowed consumers to pay for purchases over time. In most cases, a down payment is required with plans usually up to a maximum of $1,000. Any late or missed payments will result in additional fees.
According to a CFPB report, BNPL’s popularity has grown so rapidly that the five largest lenders, Affirm, Afterpay, Klarna, PayPal and Zip, were responsible for 180 million loan creations totaling $24.2 billion in 2021. These numbers dwarf the data from 2019, which saw these same lenders generate 16.8 million loans worth $2 billion in 2019.
Consumers face some risks when buying now and paying later
While the lack of interest payments and intermittent payment plans may be attractive to most consumers, CFPB researchers found that BNPL loans were associated with some potentially harmful risks.
- Lack of standardized consumer protection measures. Among the CFPB’s concerns 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 subject to things such as a “lack of standardized disclosures on the cost of credit, minimal dispute resolution rights, mandatory subscription to automatic payments, and companies assessing multiple late fees on the same missed payment.” “.
- Younger access to debt. The researchers found that among the top five users of lenders, the average borrower who sought to use BNPL tended to be on the younger side. According to the data, younger millennials (25-33 years old) were the largest group, with older Millennials (34-40 years old) and Generation Z (aged 18-24 years) taking second and third places.
- Debt normalization. By getting young people involved early, he risks normalizing outstanding debts 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 that the prevalence of late fees increased from 7.8% to 10.5% at the same time.
- Lenders are beginning to switch to collecting and selling user data. Despite the growing popularity of BNPL schemes, researchers have found that profit margins have begun to shrink, moving from 1.27% in 2020 to 1.01% of the total original loan amount. With revenues dwindling, the CFPB said they have learned that some lenders are building a “valuable digital profile of each user’s shopping preferences and behavior” by shifting toward proprietary apps.
How does CFPB . respond?
Although BNPL providers fall under some state and federal oversight, the CFPB uses its power over credit providers and “has the authority to supervise any people involved other than a deposit, such as a Buy Now provider, Pay Later, in certain circumstances.”
To that end, the CFPB said it will begin to identify areas in which it can provide guidance and set rules to ensure BNPL lenders comply with many of the basic safeguards Congress has already established for credit cards “and will undergo regular inspections. When it comes to the risk of borrowers getting too many BNPL loans, The Bureau will consider how lenders can begin to follow strict credit reporting practices.On the issue of data collection, the US Central Bank will find and advocate data collection practices that lenders should avoid.