Consumer Bureau Study Details Rapid Growth of Buy Now, Pay Later Products

Regulator seeks to extend key consumer protections to growing credit product

A study released by the Consumer Financial Protection Bureau (CFPB) details the rapid expansion of consumer credit through buy now, pay later (BNPL) products such as Affirm, AfterPay, and PayPal's Pay in 4.

The CFPB notes that these products are taking the place of credit cards in providing relatively easy access to credit and in terms of frequency of use at checkout - whether online or in-store. As a result of the ubiquity of the products, CFPB is seeking to ensure key consumer protections are provided to users of BNPL.

“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 is a form of interest-free credit that allows a consumer to fully purchase a product, and then pay back the loan over four installments, with the first installment typically being a down payment on the purchase. Most Buy Now, Pay Later loans range from $50 to $1,000, and are subject to late fees if a borrower misses a payment.

When used carefully, these products can provide relatively easy access to small dollar credit and fairly low risk to the consumer. However, the CFPB's report highlighted some key areas of concern, including:

• 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.
• 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. The practice of 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 who own the largest volume of consumer data, and reduce long-term innovation, choice, and price competition.
• 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 making a decision to originate new loans.

The CFPB report indicates the agency will be taking steps to extend protections to consumers in order to address these concerns.

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