Unregulated buy now, pay later programs could create debt trap, banking advocates say

Banking advocates have told regulators that buy now, pay later options can create a debt trap for consumers. (iStock)

The Consumer Financial Protection Bureau (CFPB) opened an investigation into buy now, pay later (BNPL) providers in December, and now banking advocates are warning of the potential debt trap this financial offering could create.

BNPL allows consumers to break up the cost of their purchases into smaller installments to be paid back over a period of weeks or months. BNPL providers such as Sezzle, Klarna and Afterpay partner with merchants and offer interest-free payments but can charge late fees or other penalties if a shopper fails to pay on time.

"BNPL has taken the nation by storm, but the ease and convenience afforded by the product has also raised legitimate questions of whether users are receiving the high level of protection they deserve from under-regulated fintechs, who control a majority of the market, but do not abide by the same federal oversight as America’s leading banks," the Consumer Bankers Association (CBA) said in a statement on March 22.

As part of its investigation, the CFPB sent out orders to Affirm, Afterpay, Klarna, PayPal and Zip to collect information on BNPL risks and benefits. The CFPB at the time stated that it is concerned with accumulating debt, the product’s regulation and data harvesting.

If you have racked up debt using BNPL services, you could consider taking out a personal loan to help you consolidate and pay it off. Visit Credible to find your personalized interest rate without affecting your credit score.

CFPB OPENS INVESTIGATION INTO BUY NOW, PAY LATER CREDIT PROGRAMS

BNPL could increase debt burden

The CBA explained that, unlike traditional banks, fintech companies are not regulated to ensure they check a consumer’s credit history or their ability to repay during the approval process. The CFPB’s investigation into BNPL could eventually lead to an increase in BNPL regulations.

"Unaffordable credit may provide a quick inflow of cash, but over the longer term – which, in the case of BNPL, can be just a few weeks or months down the road – unregulated fintech products can add to the debt burden of consumers already overextended by debt," Mike Calhoun, president of the Center for Responsible Lending (CRL), said. "The time for regulators to rein in BNPL is now."

The use of BNPL is on the rise, increasing by about 300% each year since 2018, according to Bloomberg. And the traditionally online financing option has also begun expanding to brick-and-mortar retailers through mobile pay options. Klarna recently announced a multi-year partnership with Brookfield Properties, a global real estate developer and operator, to bring its payments to Brookfield’s portfolio of more than 150 shopping centers in the U.S.

If you're struggling to pay back debt from multiple BNPL transactions, a debt consolidation loan could help you. Visit Credible to compare multiple personal loan lenders at once and choose the one with the best interest rate for you.

MANY BUY NOW, PAY LATER USERS WOULD PREFER THIS OFFERING THROUGH THEIR BANK, STUDY SAYS

CFPB should focus on regulating 3 categories, banking advocates say

The CBA advocated for the CFPB to consider a few recommendations to help keep consumers safe while using BNPL services. It said looking into BNPL providers is the first step toward instituting a level regulatory playing field.

Creditworthiness

Lenders evaluate a borrower's creditworthiness by checking their credit history to see if they have a good enough credit profile to obtain the loan they are asking for. Lenders will check how much debt a borrower already has, their credit score, whether they pay their debts back on time and more.

"Ensuring non-bank fintech providers are applying appropriate creditworthiness analysis will help strengthen the financial health of consumers and mitigate their potential for accumulating unwanted and unsustainable debt," the CBA said.

Disclosures

The CBA advocated for a standardized, simple disclosure statement to ensure consumers are sufficiently informed about the products they are using. This could help with consumer’s knowledge about late fees and other penalties if they fail to make their payments on time.

Data protection

Protecting data and personal information online is a growing concern as cyber security threats become more commonplace. The CBA wants the CFPB to examine and enforce fintech’s data privacy laws to ensure sensitive information is kept private.

If you have been using BNPL products and are unable to keep up with the payments, a personal loan could help you pay off your debt. Contact Credible to speak to a loan expert and see if this is the right option for you.

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