The CFPB study outlines the need for “Buy Now, Pay Later” rules.

The Consumer Financial Protection Bureau (CFPB) is gearing up to enforce the same kind of stringent protections it imposes on credit card companies in the “Buy Now, Pay Later” (BNPL) industry, following the release of a recent study on the practice. . Officials said their findings revealed a booming industry that not only had few consumer guardrails and helped normalize debt, but had also fostered data collection and monetization efforts with little oversight.

“Buy now, pay later is a fast-growing type of loan that acts as a close substitute for credit cards,” CFPB director Rohit Chopra said on 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 takeaway

  • Buy Now, Pay Later is an interest-free payment option that primarily helps you pay for goods and services online.
  • The option grew significantly during the pandemic, with Affirm, Afterpay, Klarna, PayPal and Zip originating 180 million Buy Now and Pay Later loans totaling over $ 24 billion last year alone.
  • A buy now, pay later industry study 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 risks such as rampant data collection.

Buy now, pay later is a booming industry

With such a great focus on online retailing in recent years, some businesses and lenders have started promoting their BNPL products. Whether it’s “pay-in-four”, “split pay” or BNPL, the concept is the same: it was interest-free installment point-of-sale loans that allow consumers to pay for their purchases over time. In most cases, a down payment is required with plans typically capped at around $ 1,000. Any delays or missed payments will result in an additional charge.

According to the CFPB report, BNPL’s popularity has grown so rapidly that the top five lenders, Affirm, Afterpay, Klarna, PayPal, and Zip, have been responsible for 180 million in loan disbursements totaling $ 24.2 billion. in 2021. These figures dwarfed the 2019 data, which saw those same lenders originating 16.8 million loans worth $ 2 billion in 2019.

Consumers face certain risks with Buy Now, Pay Later

While the lack of interest payments and staggered repayment schedules may be tempting to most consumers, CFPB researchers found that BNPL loans were associated with some potentially damaging risks.

  • Lack of standardized consumer protections. Chief among the CFPB’s concerns is the apparent lack of consistent oversight and consumer protections. As lenders operate outside the boundaries of credit card regulation, some consumers may find themselves vulnerable to things like “lack of standardized cost of credit information, minimum dispute resolution fees, a forced opt-in for automatic payment and companies that assess multiple default fees on the same non-payment. “
  • Younger access to debt. The researchers found that among the users of the top five lenders, the average borrower trying 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) taking second and third places.
  • Normalize the debt. By getting young people into debt first, you run the risk of normalizing debt maturation without proper management. The ease of obtaining a BNPL loan is highlighted by the fact that loan approval ratings have risen from 69% in 2020 to 73% in 2021 and that the prevalence of overdue fees has risen from 7.8% to 10.5% during the same period.
  • Lenders have started moving towards collecting and selling user data. Even as BNPL plans became popular, the researchers found that profit margins began to shrink, dropping from 1.27% in 2020 to 1.01% of the total originated loan amount. With yields falling, the CFPB said it learned that some lenders were building a “valuable digital profile of each user’s shopping preferences and behavior” by switching to proprietary apps.

How the CFPB is responding

Although BNPL providers fall under the oversight of some states and federal states, the CFPB is using its power over credit providers and “has the authority to supervise any person covered by the deposit, such as a supplier. Buy Now, Pay. after, under certain circumstances. ”

To that end, the CFPB said it will begin identifying areas where it can provide guidance and establish rules to ensure BNPL lenders “adhere to many of the basic protections that Congress has already established for credit cards” and will be subject to regular inspections. When it comes to the risk of borrowers taking out too many BNPL loans, the bureau will look at how lenders can start following accurate credit reporting practices. Regarding the issue of data collection, the CFPB will identify and indicate the data collection practices that lenders should avoid.

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