By David Haber
Global Legal Law Firm
On Dec. 16, 2021, the Consumer Financial Protection Bureau issued orders to five companies that offer buy now, pay later (BNPL) credit. The CFPB ordered Affirm, Afterpay, Klarna, PayPal, and Zip to collect information about the risks and benefits of these loan programs. The consumer credit market is rapidly changing with technology advances, raising concerns about accumulating debt, data harvesting and regulatory arbitrage.
The CFPB issued the orders so it can report to the public about changing industry practices and risks. Similar to old layaway plans, BNPL lets consumers get products immediately, but it also puts them into debt right away.
BNPL generally allows consumers to make purchases in small installments, typically four or less, many times with a 25 percent payment required at checkout. The product usually comes with no interest, and the quick application process requires little information. The five companies ordered to give information claim BNPL is a safer alternative to credit card debt that serves consumers with bad credit histories.
Merchants like BNPL because consumers will often spend more on their products, justifying paying up to 6 percent of the purchase price, a cost similar to interchange fees. Many merchants saw a noticeable increase in BNPL use during the COVID-19 pandemic, which drove consumers to electronic payments instead of cash. The CFPB claims that the holiday shopping season saw explosive growth in BNPL sales. Many savvy investors noticed this massive growth, leading venture capital and technology companies to get into the game.
The CFPB is required to monitor consumer financial markets, and the law enables the agency to make companies submit information to help monitor consumer financial habits. Once the CFPB collects this information, it will publish its findings. The orders are intended to cast new light on various consumer credit products and the business practices supporting them.
The CFPB is specifically concerned about:
BNPL has grown domestically and internationally, spurring other countries to closely examine BNPL providers. The CFPB is working with international partners such as Australia, Germany, Sweden, and the United Kingdom’s Financial Conduct Authority. Merchants who offer BNPL, and the electronic payments providers who support them, can expect further inquiries as those programs continue to grow.
David Haber is a senior associate with Global Legal Law Firm, which has years of experience tracking the legal developments in the electronic payments space and helping clients develop strategies for various laws and prevailing interpretations across the United States. Contact Global at email@example.com.
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