As more consumers turn to Buy Now, Pay Later options to afford necessities like groceries, gas, and pet care, the Consumer Financial Protection Bureau (CFPB) says it’s time to regulate these financial technology companies in a fashion similar to credit cards.

On Sept. 15, 2022, the Consumer Financial Protection Bureau (CFPB) released a new report that found “several areas of risk of consumer harm” existed in BNPL business practices, including data harvesting, debt accumulation, and “loan stacking” — or juggling multiple payment plans at once without any regard for the affordability of those debt payments. 

Based on the report’s findings, CFPB Director Rohit Chopra asked the CFPB to take several steps toward mitigating dangers associated with the BNPL industry to protect the financial health of American consumers, including ensuring that Buy Now, Pay Later firms at least adhere to the baseline protections Congress has already established for credit cards nationwide.

“Buy Now, Pay Later is a rapidly growing type of loan that serves as a close substitute for credit cards,” said CFPB Director Rohit Chopra. “We will be working to ensure that borrowers have similar protections, regardless of whether they use a credit card or a Buy Now, Pay Later loan.”

Buy Now, Pay Later providers are currently subject to some federal and state oversight.  However, it’s not consistent. 

Some states consider Buy Now, Pay Later to be a form of consumer credit and require state licensing or registration, as well as compliance with state consumer credit laws. In contrast, other states do not require licensing or registration for Buy Now, Pay Later products with no interest or finance charges.

In other words, the CFPB has some authority to supervise Buy Now, Pay Later providers in certain circumstances. But the agency says its authority doesn’t go far enough and recommends that BNPL lenders adhere to the baseline protections Congress has already established for credit card companies.

“Buy Now, Pay Later firms are harvesting and leveraging data in ways we don’t see with other companies,” CFPB Director Rohit Chopra said in a media call on Sept. 12, 2022. “Through their proprietary interfaces, they can see which products we buy through product placement.”

The CFPB’s announcement that more rules and regulations are required to protect the financial health and well-being of American consumers comes after the agency first announced its inquiry into the BNPL industry in December 2021. 

Remind Me: What is BNPL?

Buy Now, Pay Later (BNPL) is a form of credit that allows a consumer to split a retail transaction payment into smaller, interest-free installments that are to be repaid within a certain amount of time. 

The typical BNPL structure divides a $50 to $1,000 purchase into four equal installments, with the first installment paid as a down payment due at checkout, and the next three payments are typically due in two-week intervals over a six-week time period.

Buy Now, Pay Later rose to prominence in the past decade as an alternative form to credit cards for online and in-store retail purchases. BNPL boasted interest-free payments and no credit check required, which attracted consumers who wanted the flexibility of buying goods and services without having to use an actual credit card. 

But now, more and more attention is being paid to how these Buy Now, Pay Later programs really work and how they financially affect those who use them – especially those who are more prone to overspending and missed or late payments.

“Buy Now, Pay Later is engineered to encourage consumers to purchase more and borrow more,” the CFPB report said. “As a result, borrowers can easily end up taking out several loans within a short timeframe at multiple lenders or Buy Now, Pay Later debts may have effects on other debts.”

Are BNPL Zero Risk? CFPB Says No

The marketing of Buy Now, Pay Later loans can make them appear to be a zero-risk credit option; but as the CFPB report highlighted, BNPL loans include several areas of risk of consumer harm, including data harvesting, debt accumulation, and “loan stacking” — or juggling multiple payment plans at once. 

“Buy Now, Pay Later also relies on another longtime method of marketing: buying with ‘four easy payments,’” Chopra said. “Decades ago, infomercials began to depict audiences wowed by rotisserie roasters, juicers, home fitness equipment, and more by allowing viewers to call a toll-free number and purchase with four easy monthly payments. This has been a long, time-tested method for increasing sales. Buy Now, Pay Later allows more retailers to sell using this informercial-style approach.”

“Put simply, Buy Now, Pay Later can be compared to a credit card that incorporates informercial-style payment plans. 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.

• Inconsistent consumer protections: Borrowers seeking Buy Now, Pay Later credit may encounter products that do not offer protections that are standard elsewhere in the consumer financial marketplace. These include a lack of standardized cost-of-credit disclosures, minimal dispute resolution rights, a forced opt-in to autopay, and companies that assess multiple late fees on the same missed payment.

“Buy Now, Pay Later lenders are not offering the same clear set of dispute protections that credit card issuers have long been required to offer, which is creating chaos for some consumers when they return their merchandise or encounter other difficulties,” Chopra said. “Many Buy Now, Pay Later lenders do not offer clear and comparable disclosures of the terms of the loan like other lenders.”

• Data harvesting and monetization: Many Buy Now, Pay Later lenders are shifting their business models toward proprietary app usage, which allows them to build a valuable digital profile of each user’s shopping preferences and behavior. Harvesting and monetizing consumer data across the payments and lending ecosystems may threaten consumers’ privacy, security, and autonomy. It also may lead to a consolidation of market power in the hands of a few large tech platforms that own the largest volume of consumer data and reduce long-term innovation, choice, and price competition.

“Buy Now, Pay Later firms are building business models dependent on digital surveillance,” Chopra said. “In some ways, these firms aren’t just lenders, they are also advertisers and virtual mall operators. Because they are deeply embedded as a payment mechanism for e-commerce, Buy Now, Pay Later lenders can gather extraordinarily detailed information about your purchase behavior, in a way traditional cards cannot. Buy Now, Pay Later has mimicked parts of Big Tech’s surveillance model to harvest and monetize data in ways that banks and credit unions have typically avoided.”

• Debt accumulation and overextension: Buy Now, Pay Later is engineered to encourage consumers to purchase more and borrow more. As a result, borrowers can easily end up taking out several loans within a short time frame at multiple lenders, or Buy Now, Pay Later debts may have effects on other debts. Because most Buy Now, Pay Later lenders do not currently furnish data to the major credit reporting companies, both Buy Now, Pay Later, and other lenders are unaware of the borrower’s current liabilities when deciding to originate new loans.

“Additionally, consumer reporting companies have been slow to develop mature credit reporting protocols with respect to Buy Now, Pay Later,” Chopra said. “Mortgage lenders and auto lenders have raised concerns to me that the growth of Buy Now, Pay Later with no associated credit reporting makes it more challenging to know whether a borrower can afford a mortgage or auto loan. The Buy Now, Pay Later firms themselves also may have no idea how many other loans a consumer may have with other Buy Now, Pay Later providers.”

The CFPB noted that they know U.S. consumers have roughly $900 billion in outstanding credit card debt, but the total debt load for BNPL is unknown.

From Affording Wants to Affording Needs

According to the September 2022 report released by the CFPB on Buy Now, Pay Later market trends and the impact on the consumer’s financial health and wellbeing, the BNPL industry grew rapidly during the pandemic, with just five of the top BNPL firms reporting they originated more than 180 million loans in 2021, totaling more than $24 billion, which the CFPB says is a near tenfold increase from 2019.

Once a niche financial offering that was heavily concentrated in apparel and beauty, Buy Now, Pay Later has now branched out to industries like travel, pet care, and even groceries and gas. 

How dramatic has this shift in BNPL use been? Apparel and beauty merchants combined accounted for 80.1 percent of BNPL loans in 2019 but only accounted for 58.6 percent of BNPL loans in 2021.

Other highlights from the CFPB report concerning Buy Now, Pay Later loan usage include:

• Loan approval rates are rising: 73% of applicants were approved for credit in 2021, up from 69% in 2020.
• Late fees are becoming more common: 10.5% of unique users were charged at least one late fee in 2021, up from 7.8% in 2020.
• More purchases are ending in returns: 13.7% of individual loans in 2021 had at least some portion of the order that was returned, up from 12.2% in 2020.
• Lenders’ profit margins are shrinking: Margins in 2021 were 1.01% of the total amount of loan originated, down from 1.27% in 2020.

Not surprisingly, the BNPL companies disagree that harmful or predatory tactics were being used to convince consumers to use BNPL instead of traditional credit card products and reiterated that Buy now, pay later providers provide access to no-interest loans that work in most people’s favor.

Penny Lee, CEO of the Financial Technology Association, a trade group that represents Afterpay, Klarna, PayPal, and Zip, said in a statement that the report made clear that BNPL is a competitive alternative to high-interest credit products.

“The fact is that consumers are choosing Buy Now, Pay Later as a competitive alternative to high-interest credit products that trap them in cycles of debt,” said Penny Lee, the CEO of the Financial Technology Association. “We look forward to continuing working with regulators like the CFPB to advance positive consumer outcomes.” 

Similarly, a spokesperson for Affirm said the company’s top priority is “empowering consumers by providing a safe, honest and responsible way to pay over time with no late or hidden fees.” 

The Affirm spokesperson noted the CFPB report acknowledged that BNPL imposes significantly lower costs to consumers than traditional credit cards and said the company was “encouraged by the CFPB’s conclusions.”

A spokesperson for Klarna said the company “is committed to financial wellbeing and protecting consumers through industry innovation and proportionate regulation.”

“Low-cost, low-risk, no-interest products like BNPL should not fundamentally be regulated in the same fashion as high-cost credit products which rely on consumer fees and revolving debt,” a Klarna spokesperson added.

However, several consumer advocates applauded the CFPB’s push for additional regulations, especially as more consumers are using BNPL services to afford “essential” purchases like groceries and gas. 

Marshall Lux is a fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School. He called the CFPB’s findings on BNPL “very encouraging.”

“It was certainly a call out to non-banks that it’s going to be tougher going forward,” Lux said. The “good news is they will be regulated,” he added.

What do you think of the CFPB’s push to regulate the Buy Now, Pay Later industry? Have you had an experience with BNPL that left you financially devastated? Or did you find BNPL easier to use than a traditional credit card? Let us know in the comments below!