CFPB seeks to regulate ‘buy now, pay later’ companies


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

The Consumer Financial Protection Bureau (CFPB) said it plans to start regulating buy now, pay later (BNPL) companies, over concerns that fast-growing finance products could hurt consumers.

The CFPB, which does not currently oversee BNPL providers, plans to issue guidelines or rules that would bring the industry in line with the standards that Congress has already established for credit cards, the agency said in a report released in 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 intensifies, calls for more regulations. last december, CFPB 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 findings related to this RFI.

“Buy now, pay later is a rapidly growing type of loan that is closely replacing credit cards,” Chopra said in a statement. “We will work to ensure borrowers have similar protections whether they are using a credit card or a Buy Now, Pay Later loan.”

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CFPB report identifies areas of potential consumer harm

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

The CFPB said the collection of data and the monetization of that data put consumers’ “privacy, security and autonomy” at risk.

Chopra also said the agency is concerned that as big tech players enter the space, it could consolidate market power, reducing long-term innovation, choice and price competition in the space. ‘industry. It also gives these big players access to a huge amount of consumer data.

“In the United States, we have generally had a separation between banking and commerce,” Chopra said. “But as Big Tech-style business practices are adopted in payments and financial services, that separation is disappearing.”

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

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BNPL borrowers may struggle to repay debt, says CFPB

BNPL’s suppliers partner with retailers to allow shoppers to split the cost of their online purchases into installments at checkout. Part of the appeal is that installment payments, which usually begin a few weeks after purchase, are interest-free. However, missed payments may result in late fees and other penalties.

BNPL companies generally do not report to credit bureaus, making them a relatively accessible option for consumers. The CFPB fears that the ease of access to this financing product exposes consumers to the risk of rapid over-indebtedness and pushes them further into debt.

Consumer approval rating for BNPL financing increased to 73% in 2021 from 69% in 2020, and consumers more and more sought after the financing option to pay for day-to-day expenses like groceries and utilities, according to the CFPB.

But the agency said loan performance metrics showed BNPL borrowers may struggle to service their debts. More than 10% of borrowers were charged at least one late fee in 2021, up from 7.9% in 2020. And the industry’s write-off rate, or bad loan rate, jumped to 2.39% in 2021, compared to 1.83% in 2020.

Bob Bilbruck, CEO of Captjur, said increased regulation of this industry is unlikely to dampen the appetite for BNPL programs as demand is high, especially among millennials born between 1981 and 1996 and Generation Z consumers.

“The flip side, in my view, is that in a recession, the deferred debt that these programs will cause within the consumer economy could have crippling effects down the road,” Bilbruck said. “BNPL could be the financial weapon of mass destruction that would effectively destroy the consumer credit vertical and companies that choose to support these programs could be greatly affected.”

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