CFPB seeks to regulate the purchase now, the payment of subsequent companies

The Consumer Financial Protection Bureau (CFPB) said it is trying to bring the rules for the buy now, pay later (BNPL) industry into line with those already established for credit cards. (iStock)

The Consumer Financial Protection Bureau (CFPB) said it plans to start regulating companies buy now, pay later (BNPL) out of concern that fast-growing financing products are harming consumers.

The CFPB, which currently does not control BNPL providers, plans to issue guidelines or rules that would bring the industry into line with the standards Congress has already set for credit cards, the agency said in a report released to September. As part of this review, the agency will also ensure that BNPL lenders, just like credit card companies, are subject to appropriate supervisory reviews.

As interest in the financial product increases, so does the demand 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 relating to this request for information.

“Buy now, pay later is a fast-growing type of loan that acts as a close substitute for credit cards,” Chopra said in a statement. “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.”

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The CFPB report identifies areas of potential harm to consumers

The CFPB report mentioned several areas in the BNPL space which it classified as “potential risks to consumers”. One of these key areas was consumer privacy and data protection.

The CFPB said that collecting data and monetizing that data puts consumers’ “privacy, security and autonomy” at risk.

Chopra also said the agency is concerned that the entry of large tech players into the space could consolidate market power, thereby reducing long-term innovation, choice and price competition in the industry. It also gives these larger players access to huge amounts of consumer data.

“In the US, we’ve generally had a separation between banking and commerce,” Chopra said. “But, as Big Tech-style business practices are adopted in the payment and financial services arena, that separation comes out the door.”

Chopra also raised the flag on these issues later Apple announced its BNPL product, Apple Pay Later, earlier this year.

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BNPL borrowers may find it difficult to repay debt, CFPB says

BNPL vendors work with retailers to allow buyers the ability to split the cost of their online purchases across multiple installations at checkout. Part of the appeal is this installation payments, which typically start within a few weeks of purchase, are interest-free. However, missed payments can result in late fees and other penalties.

BNPL companies typically don’t report to credit bureaus, which makes them a relatively affordable option for consumers. The CFPB fears that the ease of access to this financing product could expose consumers to the risk of rapidly becoming overextended and push them into even more debt.

The consumer approval rate for BNPL financing grew to 73% in 2021, compared to 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 loan performance metrics showed that BNPL borrowers may struggle to meet their debt obligations. More than 10% of borrowers were charged at least one overdue fee in 2021, up from 7.9% in 2020. And the industry’s charge rate, or bad loan rate, jumped to 2.39% in 2021, up from 1.83% in 2020.

Bob Bilbruck, CEO of Captjur, said that more regulation in this area probably wouldn’t dampen the appetite for BNPL programs because demand is high, particularly among millennials born between 1981 and 1996 and Gen Z consumers.

“The bad flipside, in my opinion, is that, in a time of recession, the delayed debt these programs will cause within the consumer-based economy could have crippling effects along the way,” Bilbruck said. “BNPL could be the financial weapon of mass destruction that actually breaks down the consumer credit vertical and companies that choose to support these programs could suffer greatly.”

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