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‘Digital Surveillance’ Questioned at Afterpay, Klarna and More

The buy now, pay later (BNPL) industry could soon face federal regulatory action.

A Consumer Financial Protection Bureau (CFPB) report says the rise of pay-by-installment providers could risk users’ privacy and financial wellbeing. CFPB director Rohit Chopra said companies in the installment payments space could soon be subjected to similar reporting requirements to credit card companies.

The agency started investigating the sector in December. Affirm, Afterpay, Klarna, PayPal, and Zip (formerly Quadpay in the U.S.) reported managing 180 million collective loans worth more than $24 billion last year—a near tenfold increase from 2019. BNPL users faced “uneven disclosures and protections” across platforms, CFPB said.

“We find that Buy Now, Pay Later firms are building business models dependent on digital surveillance,” Chopra said. Pay-by-installment lenders use “extraordinarily detailed” purchase behavior data to target customers through promotions with brand and retail partners, he added.

Big Tech similarly harvests and monetizes data “in ways that banks and credit unions have typically avoided,” Chopra said This encourages consumers to purchase more than they would with a typical credit card transaction. BNPL players continuously tweak their interfaces and even gamify the lending experience to increase usage and revenue. In fact, the average purchase value via BNPL loan rose to $135 in 2021 from $121 in 2020. BigCommerce’s 4,000-plus consumer survey found that 74 percent of BNPL users said influential pay-later marketing encouraged them to use the service.

BNPL’s role in consumer habits seems to be evolving. BigCommerce data showed that 36 percent of U.S. shoppers have now used BNPL, and global Google trends data found a 200 percent year-over-year rise in “buy now, pay later apps” searches. BNPL accounted for 2.9 percent of 2021’s global e-commerce transaction value, and is projected to reach 5.3 percent by 2025.

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While apparel and beauty orders accounted for more than 80 percent of BNPL transactions in 2019, that number dropped more than 21 percent by 2021. Gas and transportation, groceries, restaurants and utilities are now driving a larger share of BNPL usage, CFPB said. These “essentials,” accounting for just $3.2 million of BNPL spend in 2019, reached $229.2 million by the end of 2021. More than 40 percent of BigCommerce respondents with incomes ranging from $25,000 to over $100,000 said they use pay-by-installment plans to manage their budgets.

“Personal effects,” which CFPB defines as electronics, fitness and sporting equipment, games and hobbies, and jewelry, accounted for 4.5 percent of total purchases in 2019, but in 2021 made up 11.2 percent. “Mass market” items, including general merchandise from department stores, discount wholesalers and general, stores grew from 6.5 percent of BNPL share in 2019 to 10.8 percent two years later.

CFPB warned that BNPL consumers might end up facing “overextension,” or taking out multiple pay-later loans at once. Those who become overly reliant on BNPL could have a harder time paying their rent and bills, it added.

“While major providers don’t currently rely on charging interest, they make money through fees charged both to sellers and to consumers who don’t pay on time,” Chopra said. The bureau said 10.5 percent of users paid fees for not repaying their loans on time in 2021, up from 7.8 percent the year prior. And while most pay off loans using their debit cards, a growing number is “charging off” their payments to credit cards and essentially transferring debt. Data showed that 3.8 percent did so in 2021, up from 2.9 percent in 2020. According to CFPB’s analysis of public filings, this trend has continued through the first half of 2022.

Overextension has long been a problem in the credit card market, Chopra added, but those companies are more closely regulated than BNPL. Mortgage and auto lenders are concerned that BNPL’s lack of credit reporting makes it harder for them to determine if a prospective borrower can afford to take out a home or car loan, he pointed out.

CFPB wants to create “guidance or rules to issue with the goal of ensuring that Buy Now, Pay Later firms adhere to many of the baseline protections that Congress has already established for credit cards,” Chopra said. The agency is also working with the Federal Trade Commission to identify the data surveillance practices that “may need to be curtailed,” such as demographic, transactional and behavioral data that BNPL providers share with merchants or use to target consumers with ads.

BNPL companies will face “supervisory examinations” on a “compulsory basis” if new rules take effect, Chopra said.

“We understand that some Buy Now, Pay Later firms may welcome CFPB examination in order to identify potentially problematic business practices before they create widespread harm,” he added. “We are inviting these firms to self-identify to us if they wish to be examined.”