The Consumer Financial Protection Bureau (CFPB) issued a series of orders Thursday to five companies – Affirm, Afterpay, Klarna, PayPal and Zip – to collect information on the risks and benefits associated with “buy now, pay later” technology.
According to a release, the CFPB is concerned about accumulating debt, regulatory arbitrage, and data harvesting in a market saturated with growing BNPL options.
“Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too,” said CFPB Director Rohit Chopra.
Buy now, pay later refers to an increasingly popular deferred payment that generally allows the consumer to split a purchase into smaller installments, typically four or less, often with a down payment of 25% due at checkout.
Ahead of the holiday season, big box stores like Target, Michaels and Walmart announced partnerships and new offerings with BNPL tech leaders for consumers to postpone payments on their end-of-year shopping. Financial giant PayPal reported a 400% surge in BNPL volume on Black Friday – five times higher compared to last year.
With BNPL, merchants pay a fee to the platform they’ve partnered with to offer the service. However, these companies typically count on offsetting that cost by enticing shoppers to spend more than they would if they had to pay all at once.
According to the results of a Credit Karma survey released in September, 44% of respondents said they had used a BNPL service at least once, and 34% of those respondents had fallen behind on one or more payments.
“Whereas the old-style layaway installment loans were typically used for the occasional big purchase, people can quickly become regular users of BNPL for everyday discretionary buying, especially if they download the easy-to-use apps or install the web browser plugins,” the CFPB warned in its inquiry.
“If a consumer has multiple purchases on multiple schedules with multiple companies, it may be hard to keep track of when payments are scheduled. And when there is not enough money in a consumer’s bank account, this can potentially result in charges by both the consumer’s bank and the BNPL provider,” the Bureau stated.
Because of wariness in predatory lending and overspending for consumers, the CFPB issued orders requesting the five companies to hand over information regarding their BNPL products, volumes, payment methods, credit reporting, underwriting and the risks associated with missing or being late on payments.
As part of Thursday’s inquiry, the CFPB said it is also working with its international partners in Australia, Sweden, Germany and the UK, specifically the Financial Conduct Authority to closely examine BNPL providers. The Bureau will also be coordinating with the rest of the Federal Reserve System, as well as its state partners.