The Consumer Financial Protection Bureau is considering ways to bring consumer protection measures for credit cards to users of buy-now-pay-later products.
Buy-now-pay-later (BNPL) products—which are typically installment loans that allow customers to divide a purchase into four equal payments—can be a cheaper, easier option for consumers when compared to other credit products, the CFPB said in a highly-anticipated report issued Thursday. But some problems with disclosures, dispute resolution and debt “stacking” in BNPL require more oversight, it said.
The CFPB said it was looking to identify “advisory opinions” or regulations that would bring more credit card-style protections to the BNPL market.
“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,” CFPB Director Rohit Chopra said in a statement.
But overall, buy now pay later “imposes significantly lower direct financial costs on consumers than legacy credit products,” the report said.
“The nature of the product structure and underwriting strategy” may minimize “overspending and debt cycles,” the CFPB added.
While the CFPB called for some changes to the BNPL industry, the tone overall was positive, said Scott Talbott, the vice president for government affairs at the Electronic Transactions Association, which includes several BNPL companies as members.
“The CFPB’s BNPL report confirms that BNPL with no fees or interest significantly helps consumers,” he said.
Surge in Popularity
The CFPB has been looking closely at BNPL products since December, when the agency issued a market monitoring demand letter to the five biggest BNPL providers: Affirm Holdings Inc.; Afterpay, which is now owned by Block Inc.; Klarna; PayPal Holdings Inc. and Zip.
BNPL products have seen a spike in popularity since 2020, particularly after the coronavirus pandemic.
The total number of BNPL loans issued annually in the US grew 970% from just under 17 million in 2019 to 180 million in 2021, the CFPB found. The total dollar volume of the loans leaped more than 1,000% in that period, from $2 billion in 2019 to $24.2 billion in 2021, the CFPB said.
Most purchases ranged from $50 to $1,000, and 89% of consumers using BNPL link their accounts to debit cards.
The most popular BNPL option in the US is known as pay-in-four, where consumers can split payments of an item across four even installments paid over six weeks. BNPL firms do soft credit and fraud checks on customers and don’t charge interest if payments are made on time, the CFPB found.
BNPL companies approved 73% of loan applicants in 2021, up from 69% in 2020.
Late fee policies vary by issuer. And the number of unique users rose to 10.5% in 2021, up from 7.8% in 2020, the CFPB said.
Consumer advocates have raised concerns about a lack of protections for BNPL users. They worry that disclosures are inadequate and dispute resolution can be difficult. Consumers can get caught up in “loan stacking” when they have multiple loans outstanding with different BNPL providers, leading to potential debt traps, they say.
Consumer credit reporting agencies like Equifax, Experian and TransUnion have only recently started to find ways to report BNPL loans. And there are concerns that consumers aren’t getting credit for on-time payments on their credit reports.
BNPL providers report missed payments to the credit reporting firms, which can lower their credit scores. But the BNPL industry and credit bureaus have been developing ways to ensure consumers can get credit for on-time payments.
The CFPB echoed many of those concerns in its report.
Disclosures from several BNPL providers conform with those mandated by the Truth in Lending Act. But the law itself only applies to companies that offer loans repaid in more than four installments. The CFPB said this has led to a lack of standardized cost-of-credit disclosures.
The report also noted that BNPL companies require consumers to try to return unwanted or damaged purchases, and get refunds, directly through merchants. That leads to confusion for customers and minimal dispute resolution rights, the bureau said.
The bureau also noted that most BNPL providers require customers to allow autopayment of outstanding loans through their debit or credit cards, limiting consumer choice and potentially leading to overdraft and other bank fees if accounts are overdrawn.
Some companies also charge multiple late fees on the same missed payment, although that wasn’t a uniform practice, the CFPB found.
The CFPB also raised concerns about the way BNPL firms use consumer data for advertising and other purposes, including monetizing that data.
The CFPB may have difficulty imposing changes on the industry. The pay-in-four product isn’t governed by either the Truth in Lending Act or Regulation Z, which governs credit cards and could provide more robust dispute resolution requirements.
Addressing loan stacking would require BNPL companies to have a single database of outstanding loans that are issued in real time, the CFPB said. Such a database doesn’t currently exist.
The CFPB is “reviewing our authorities” to compel BNPL firms to undergo examinations by CFPB examiners, Chopra said in a conference call Wednesday.
Some BNPL firms already have said they welcome the bureau’s direct oversight, he added.