CFPB opens investigation into buy now, pay later credit programs

Bureau seeks to ensure credit program not bringing harm to consumers

With the rise of buy now, pay later credit programs, the CPFB is opening an investigation to ensure they're not harming consumers.  (iStock)

Five lending companies were subject to an investigation by the Consumer Financial Protection Bureau (CFPB) as of Dec. 16, 2021 to examine the risks of buy now, pay later (BNPL) options.

BNPL is a credit option that allows splitting a purchase into smaller installments – usually no more than four interest-free payments – with a small down payment of about 25% at checkout. The application usually requires little consumer information and may include late fees.

Orders were sent out to Affirm, Afterpay, Klarna, PayPal and Zip to collect information on BNPL risks and benefits. The CFPB stated that it is concerned with accumulating debt, the product’s regulation and data harvesting.

"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," CFPB Director Rohit Chopra said. "We have ordered Affirm, Afterpay, Klarna, PayPal, and Zip to submit information so that we can report to the public about industry practices and risks."

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CFPB seeks to prevent harm to consumers

Banking industry experts say that the CFPB’s investigation is a way for it to learn about the use of BNPL and to prevent harm to consumers. 

"Use of ‘Buy Now, Pay Later’ credit has exploded, so it is important that we understand the impacts of this debt. In opening this inquiry, the Consumer Bureau is taking a great first step in learning about this industry and toward preventing harm to consumers," said Marisabel Torres, director of California policy at the Center for Responsible Lending (CRL).

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Merchants allow BNPL so consumers can spend more

Merchants usually pay a fee of about 3% to 6% of the purchase price to BNPL companies to allow consumers to use it on their site. This is because consumers often spend more money when using BNPL, according to the CFPB. 

The CFPB stated that it’s concerned BNPL will lead to consumers quickly accumulating debt over small, everyday discretionary buying. 

"If a consumer has multiple purchases on multiple schedules with multiple companies, it may be hard to keep track of when payments are scheduled," the CFPB stated. "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. Because of the ease of getting these loans, consumers can end up spending more than anticipated."

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