The Consumer Financial Protection Bureau signaled it plans to issue new regulations for ‘buy now, pay later’ firms to ensure they adhere to similar rules as credit cards.
“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’,” said CFPB Director Rohit Chopra in a Sept. 15 report.
BNPL is viewed as interest-free credit that allows consumers to purchase a product and pay the loan back over four installments, the first of which being a down payment on the purchase. BNPL has risen in popularity over the past decade as an alternative form of credit for online retail purchases.
The report outlined a number of issues the CFPB sees in the BNPL industry, including that the loans do not offer customers similar protections to other forms of financing. “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,” the CFPB stated.
The data harvesting methods BNPL firms employ leave customer data privacy at risk and increases the risk of loan overextension, according to the regulatory agency. “The BNPL product is often structured in ways that may present borrowers with undesirable operational hurdles, including the lack of clear disclosures of loan terms, challenges in filing and resolving disputes, and a requirement to use autopay for all loan payments,” the CFPB stated.
The report outlined the findings of a survey taken last December from five major providers of BNPL loans, including Affirm, Afterpay, Klarna, PayPal and Zip. The number of BNPL loans originated by those lenders grew from 16.8 million to 180 million from 2020-21. The dollar volume of those originations jumped from $2 billion to $24.2 billion.
According to the report, Loan approval rates increased from 69 percent in 2020 to 73 percent the following year. Late fee usage became more common as well: 10.5 percent of unique users were charged at least one in 2021, an increase from 7.8 percent the previous year.
Lenders’ profit margins of the total amount of loan originated fell from 1.27 percent in 2020 to 1.01 percent last year.