The Green Sheet Online Edition

February 14, 2022 • Issue 22:02:01

Buy now, pay later is in the CFPB's crosshairs

By David Haber
Global Legal Law Firm

On Dec. 16, 2021, the Consumer Financial Protection Bureau issued orders to five companies that offer buy now, pay later (BNPL) credit. The CFPB ordered Affirm, Afterpay, Klarna, PayPal, and Zip to collect information about the risks and benefits of these loan programs. The consumer credit market is rapidly changing with technology advances, raising concerns about accumulating debt, data harvesting and regulatory arbitrage.

The CFPB issued the orders so it can report to the public about changing industry practices and risks. Similar to old layaway plans, BNPL lets consumers get products immediately, but it also puts them into debt right away.

An appealing product

BNPL generally allows consumers to make purchases in small installments, typically four or less, many times with a 25 percent payment required at checkout. The product usually comes with no interest, and the quick application process requires little information. The five companies ordered to give information claim BNPL is a safer alternative to credit card debt that serves consumers with bad credit histories.

Merchants like BNPL because consumers will often spend more on their products, justifying paying up to 6 percent of the purchase price, a cost similar to interchange fees. Many merchants saw a noticeable increase in BNPL use during the COVID-19 pandemic, which drove consumers to electronic payments instead of cash. The CFPB claims that the holiday shopping season saw explosive growth in BNPL sales. Many savvy investors noticed this massive growth, leading venture capital and technology companies to get into the game.

The CFPB is required to monitor consumer financial markets, and the law enables the agency to make companies submit information to help monitor consumer financial habits. Once the CFPB collects this information, it will publish its findings. The orders are intended to cast new light on various consumer credit products and the business practices supporting them.

Three areas of inquiry

The CFPB is specifically concerned about:

• Debt accumulation: Layaway programs were usually used to make the occasional large purchase, but now consumers are quickly adopting BNPL for everyday buying. This is especially true if consumers download easy-to-use applications or install web browser plugins. This can make it hard to track when payments are scheduled if a consumer made multiple purchases on multiple schedules with many different merchants. If there is not enough money in a consumer’s bank account, the bank and BNPL provider may be levied fees and other charges. Consumers can quickly spend more than they expected given the ease of getting these popular loans.
• Regulatory arbitrage: Consumer protection laws vary state by state and are updated regularly. Thus, many BNPL companies may not realize what laws apply or the risks associated with breaking them. Some BNPL products do not provide disclosures required by laws in states where they operate. Although the BNPL application looks similar to a standard online checkout, protections afforded by credit cards may not apply to BNPL programs. For example, many BNPL companies do not provide dispute resolution protections that many credit cards give. Depending on the rules of the state in which they operate, different late fees and policies apply, making it easy to violate applicable consumer protection laws.
• Data harvesting: Consumer payment histories, which are given to BNPL lenders, are valuable commodities in today’s data-driven market. Some lenders have created closed-loop shopping apps with partners, often pushing certain brands and products to younger customers. Lenders will undoubtedly seek other sources of revenue to maintain profitability as mounting competitive forces pressure merchant discounts. The CFPB wants to understand practices for data collection and sales, behavior targeting and the risks posed to consumers.

BNPL has grown domestically and internationally, spurring other countries to closely examine BNPL providers. The CFPB is working with international partners such as Australia, Germany, Sweden, and the United Kingdom’s Financial Conduct Authority. Merchants who offer BNPL, and the electronic payments providers who support them, can expect further inquiries as those programs continue to grow.

David Haber is a senior associate with Global Legal Law Firm, which has years of experience tracking the legal developments in the electronic payments space and helping clients develop strategies for various laws and prevailing interpretations across the United States. Contact Global at info@attorneygl.com.

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