BNPL draws government scrutiny

Growing adoption of buy now, pay later (BNPL) options at checkout prompted the Consumer Financial Protection Bureau to request information from leading BNPL providers about debt accumulation, regulatory arbitrage and data harvesting practices. Initiated Dec. 16, 2021, CFPB orders seek details on deferred payment options at point of purchase, stated Rohit Chopra, director at the CFPB.

Describing BNPL as a new form of layaway, Chopra claimed the practice can speed transactions as well as consumer debt. "We have ordered Affirm, Afterpay, Klarna, PayPal, and Zip to submit information so that we can report to the public about industry practices and risks," he said.

Chopra pointed out that BNPL generally allows consumers to make a down payment of 25 percent at checkout and split remaining balances into installment plans with little to no interest. Fast approvals and low barriers to entry enable consumers with scant credit profiles and subprime credit to qualify for BNPL, he noted.

Scott Talbott, senior vice president, government relations at the Electronic Transactions Association, agreed BNPL products extend reach to a broad class of consumers. "The range of BNPL products provides value to consumers, and ETA members are committed to offering BNPL and other innovative products to benefit consumers," he said.

Growing adoption

CFPB representatives observed that merchants are willing to pay 3 to 6 percent for BNPL transactions, which typically involve higher ticket items. A spike in BNPL during the pandemic and current holiday shopping season is also attracting investors and venture capital, they noted.

While most BNPL loans are interest free, the CFPB noted that most do not offer the same level of consumer protections as other loan products. For example, product returns tend to be more complicated, and late fees for missed payments can be excessive, the CFPB stated in a Dec. 2, 2021, blog post titled, "What is a Buy Now, Pay Later (BNPL) loan?"

"Returning merchandise bought with BNPL loans can sometimes be complicated," the CFPB wrote. "The BNPL company may require you to pay the total cost of a purchase until the dispute has been resolved with the merchant, so be sure to read and understand the merchant's specific return policies and the BNPL loan terms before making a purchase with a BNPL loan."

Continuing oversight

Consistent with the board's oversight of consumer financial markets, CFPB members stated the agency will publish its findings on the following:

• Accumulating debt: Consumers who "stack" multiple BNPL plans with multiple companies may find it difficult to keep track of installment payment due dates or keep up with payments. The CFPB is concerned that the ease of obtaining these loans may entice consumers to spend more than they can afford.

• Regulatory arbitrage: BNPL companies may run afoul of CFPB requirements. The agency wants to ensure that products and services comply with consumer protection laws, including disclosures, dispute resolution and late fee policies.

• Data harvesting: BNPL lenders have access to a trove of consumer data. The CFPB would like to clarify practices pertaining to data collection, behavioral targeting, data monetization and risks they may create for consumers.

"The BNPL product has seen growth internationally, and many other countries are also taking a close examination of its providers," the CFPB wrote in its Dec. 16, 2021, statement. "As part of today's inquiry, the Bureau is working with its international partners in Australia, Sweden, Germany and the UK, specifically the Financial Conduct Authority. The Bureau will also be coordinating with the rest of the Federal Reserve System, as well as its state partners."

The CFPB shared additional information about BNPL and a sample order on its website at www.consumerfinance.gov/about-us/blog/know-before-you-buy-now-pay-later-this-holiday-season/ .

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