CFPB Inquires Into “Buy Now, Pay Later” Financing
On December 16, 2021, the Consumer Financial Protection Bureau (“CFPB”) announced[1] that it ordered five companies offering “buy now, pay later” (“BNPL”) credit to turn over “information on the risks and benefits of these fast-growing loans.”
Reportedly, the CFPB issued these orders out of concerns regarding “accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology.”
These concerns are explained more as follows:
Accumulating debt: Whereas the old-style layaway installment loans were typically used for the occasional big purchase, people can quickly become regular users of BNPL for everyday discretionary buying, especially if they download the user-friendly apps or install the web browser plugins. If a consumer has multiple purchases on multiple schedules with multiple companies, it may be hard to keep track of when payments are scheduled. And when there is not enough money in a consumer’s bank account, this can potentially result in charges by both the consumer’s bank and the BNPL provider. Due to the ease of receiving approval for these loans, consumers can end up spending more than anticipated.
Regulatory arbitrage: Some BNPL companies may not be adequately evaluating what consumer protection laws apply to their products. For example, some BNPL products do not provide certain disclosures, which could be required by some laws. While the BNPL application may look similar to a standard checkout with a credit card, protections that apply to credit cards may not apply to BNPL products. Many BNPL companies do not provide dispute resolution protections available to users of other forms of credit, such as credit cards. Additionally, there may be different late fees and policies related to such fees depending on what rules the lender is following.
Data harvesting: BNPL lenders have access to the valuable payment histories of their customers. Some have used this collected data to create closed loop shopping apps with partner merchants, pushing specific brands and products, often geared toward specific audiences. As competitive forces pressure the merchant discount, lenders will need to find other sources of revenue to maintain growth and profitability.
The BNPL offers not only pose a risk to consumers, but they may also pose a risk to those companies who offer the BNPL credit. These companies should look to ensure the offers are presented in compliance with applicable credit advertising laws and not in a way that would mislead their consumers.
[1] https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-opens-inquiry-into-buy-now-pay-later-credit/