Recently, CFPB (Consumer Financial Protection Bureau) issued a sequence of orders to different companies delivering BNPL or Buy Now Pay Later credit. The orders for collecting information on the benefits and risks of the rapidly-growing loans have been extended to Zip, Affirm, PayPal, Klarna, and Afterpay. The CFPB looks into actions like data harvesting and regulatory arbitrage in the consumer credit market that continues changing with the rapid technology.
Rohit Chopra, Director at CFPB, explains that BNPL (Buy Now Pay Later) serves as an all-new version of the traditional layaway plan. However, with the more modern system, consumers are able to receive the products immediately. He added that CFPB had given orders to Zip, PayPal, Klarna, and Afterpay to deliver information so that it can be reported to the public detailing risks and industry practices.
Understanding BNPL Credit
BNPL or Buy Now, Pay Later Credit is a type of deferred payment solution that usually allows consumers to divide a particular purchase into small-sized installments, usually less than 4. It is mostly associated with a down payment of around 25% that is collected during checkout. The application process is simple and efficient for the consumer. It usually involves relatively minimal information from the end customers. Furthermore, the product is available with no interest in most cases.
Lenders have regarded BNPL as a safer alternative to managing credit card debt. It is also known for its propensity to deliver services to consumers with subprime or scant credit histories.
Merchants continue adopting revolutionary BNPL programs. They are also willing to pay around 3-6 percent of the total purchase cost to the respective companies. These fees are typically regarded as similar to credit card interchange fees. Offsetting the cost is the fact that consumers tend to purchase more with the help of BNPL. The overall use of BNPL has increased during the global pandemic. It also spiked during the holiday season.
More Americans and other global consumers continue taking advantage of this trend. The most recent Cyber Monday and Black Friday shopping weekend in 2021 witnessed impressive growth with respect to BNPL. The massive growth has grabbed the attention of a number of investors, including major venture capital money. Leading tech companies are also making an entrance into the arena.
CFPB’s Implementation of BNPL
CFPB is responsible for monitoring consumer financial markets. At the same time, it enables the agency to ask the respective market players to deliver information regarding the monitoring process. The CFPB expects to publish aggregated findings on deeper insights obtained from the inquiry. The ongoing orders aim at highlighting the range of the respective consumer credit products along with the underlying business practices.
The Bureau is specifically concerned about the following aspects:
- Regulatory Arbitrage: Some BNPL organizations might not be efficiently evaluating what specific consumer protection laws will apply to the respective products. For instance, some BNPL products do not offer specific disclosures as required by some laws. The BNPL application might appear similar to a standard checkout process with the help of a credit card. However, protections applying to different credit cards might not apply to BNPL products.
Most BNPL agencies do not offer access to dispute resolution or proper protections for other forms of credit, including credit cards. Eventually, based on what specific rules the lenders tend to follow, different policies and late fees will apply.
- Accumulation of Debt: Traditional layaway installment loans were typically utilized for the major big purchase. However, in the modern era, consumers can easily become ongoing users of BNPL services to ensure day-to-day discretionary shopping. It is especially true when they download the easy-to-use applications or go ahead with installing the web browser plugins.
When a consumer has multiple purchases on different schedules with different companies, it is difficult to maintain track of when payments will be scheduled. Furthermore, when there is not enough money in the bank account of the customer, it could eventually lead to charges by both the BNPL provider and the consumer’s bank. Due to the overall ease of getting loans, consumers will spend more than expected.
- Data Harvesting: BNPL lenders depict access to relevant payment histories of the customers. Some lenders use the collected data to design closed-loop shopping applications with partner merchants. It helps in pushing particular products and brands. It is mostly geared toward fresh, younger audiences.
As competitive parties continue putting pressure on merchant discounts, lenders will be expected to come across more sources of revenue towards maintaining profitability and growth. The Bureau expects to better understand the underlying processes around the concepts of behavioral targeting, data collection, data monetization, and potential risks they might create for the customers.
The BNPL product has witnessed immense growth across the globe. A number of other nations in the world are also observing the technology closely. As a part of the ongoing inquiry, the Bureau continues working with its esteemed international partners, including Germany, the UK, Australia, and Sweden -especially the Financial Conduct Authority. The Bureau also aims at coordinating with the remaining Federal Reserve system along with its state partners.
As per a recent survey, it has been observed that around 40 percent of BNPL consumers revealed that they use BNPL credits for ensuring purchases that would otherwise have not accommodated their budget. More recent studies have revealed that consumers who ended up over-drafting the respective accounts were at least 2 times more likely to have bought BNPL services.
As per the recommendations of the group, the Bureau is expected to ensure:
- Applying relevant credit card protections of the TILA or Truth in Lending Act
- Issuing a larger participant rule to ensure that the BNPL market remains under the supervision of CFPB
- Preventing or taking action against deceptive, unfair, or abusive practices or acts while ensuring compliance with fair lending laws
It is crucial for the CFPB to ensure BNPL lending platforms, especially BNPL credit, are handled in a way that is fair and beneficial to consumers, as well as within the parameters of existing laws regarding credit.