“Buy now, pay later” may be one of the hottest consumer spending trends right now, with Cornerstone Advisors calculating that BNPL purchases have quadrupled to $99.4 billion this year, up from $23.9 billion in 2020.
But the popular payment trend is now in the crosshairs of federal regulators concerned about how quickly shoppers can accumulate debt on the flexible spending platforms, and also about how these companies may harvest data about their customers.
On Dec. 16, The Consumer Financial Protection Bureau (CFPB) issued a series of orders to collect information on the risks and benefits of the fast-growing loans and services at Affirm, Afterpay, Klarna, PayPal and Zip, five of the most popular pay-later players.
“Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too,” CFPB director Rohit Chopra said in a statement. “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.”
Responses are due by March 1, 2022, according to the CFPB order. The comprehensive request calls for the companies to hand over transaction usage metrics and use cases, user and merchant fees, user demographics, gross merchandise value, and loan performance metrics related to servicing, credit reporting, returns and refunds, delinquencies, defaults, debt collection and charge-offs.
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The bureau also is seeking information about the data that the companies collect and retain as a result of BNPL product usage, as well as clarification on how they monetize BNPL product data.
Although each of the five major BNPL providers have differing qualities and features—for example, Affirm still charges interest rates, while Klarna and Afterpay collect late fees—the payments method is largely similar across the board.
Using the platforms, consumers can split their purchase into smaller installments, typically four or fewer, often with a down payment of 25 percent due at checkout. The application process is quick, involving relatively little information from the consumer.
Lenders have often touted BNPL as a “safer” alternative to credit card debt, along with its ability to serve consumers with scant or subprime credit histories.
But that doesn’t mean consumers have gotten off scot-free. According to an August 2021 Credit Karma study of 1,044 U.S. consumers, 34 percent of those who have used BNPL services have fallen behind on one or more payments. Of those who admitted to having missed at least one payment, 72 percent said they believe their credit score declined as a result of missing one or more payments, with 31 percent of those saying their credit score declined significantly.
The CFPB is especially concerned about how quickly and easily shoppers can use BNPL apps to rack up debt. For one, while the agency argues that layaway installment loans were typically used for an occasional big-ticket purchase, today people casually use the pay-later option for everyday discretionary and relatively low-cost items.
“If a consumer has multiple purchases on multiple schedules with multiple companies, it may be hard to keep track of when payments are scheduled,” the bureau said in the order. “And when there is not enough money in a consumer’s bank account, this can potentially result in charges by both the consumer’s bank and the BNPL provider. Because of the ease of getting these loans, consumers can end up spending more than anticipated.”
The bureau also showed concern about potential regulatory arbitrage within the sector. This is a practice where businesses can exploit regulatory differences between different markets in order to circumvent unfavorable laws. This can be achieved by conducting business, and managing products and services in locations that have lower regulatory standards.
“Some BNPL companies may not be adequately evaluating what consumer protection laws apply to their products,” the bureau said. “For example, some BNPL products do not provide certain disclosures, which could be required by some laws. And while the BNPL application may look similar to a standard checkout with a credit card, protections that apply to credit cards may not apply to BNPL products. Many BNPL companies do not provide dispute resolution protections available to users of other forms of credit, like credit cards. And finally, depending on what rules the lender is following, different late fees and policies apply.”
Finally, the third concern, data harvesting, focuses on BNPL providers’ access to their customers’ payment histories. Some have even used this collected data to create closed-loop shopping apps with partner merchants, pushing specific brands and products often geared toward younger audiences.
“As competitive forces pressure the merchant discount, lenders will need to find other sources of revenue to maintain growth and profitability,” the bureau said in the order, also indicating it “would like to better understand practices around data collection, behavioral targeting, data monetization and the risks they may create for consumers.”
As part the inquiry, the U.S. bureau is working with its international partners in Australia, Sweden, Germany and the U.K., 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.