CFPB to Regulate BNPL Like Credit Card Firms

• BNPL lenders to be monitored like credit card companies:  The U.S. Consumer Financial Protection Bureau plans to subject “buy now, pay later” lenders to the same vigorous oversight as credit card companies, saying the short-term financing industry harvests consumer data in ways that threatens consumer privacy.
  • Considered a substitute for traditional credit cards, the buy now, pay later model allows consumers to pay off a loan in a few installments, most commonly four interest-free increments. The service, provided by a host of firms such as Klarna and Afterpay, increased in popularity during the pandemic.

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• Guidance forthcoming:  The consumer watchdog, which doesn’t currently regulate the industry, plans to issue guidance to oversee the lenders and subject them to supervisory exams, CFPB officials said.
• Rise in loan approval rates:  The CFPB found that adoption of the service is growing across all age groups, according to Chopra.
  • Apparel and beauty merchants accounted for over 80% of usage in 2019 but only 58.6% in 2021 as more consumers used buy now, pay later for services such as travel, pet care, groceries and gas.
  • More customers are also getting approved for the loans. In 2021, 73% of applicants were approved, compared with 69% in 2020, according to the report.
• Consumer risks: lack of consumer protections compared with traditional credit card companies, data harvesting and monetizing customer data, debt accumulation and “loan stacking” — or taking on numerous loans at the same time.
  • Late fees are also becoming more common. The CFPB found that 10.5% of unique users were charged at least one late fee in 2021, compared with 7.8% in 2020.

See:

Why BNPL Swedish giant Klarna has sights set on Canada

Financial Consumer Agency of Canada publishes BNPL pilot study

Mike Taiano, senior director of Fitch Ratings:

“Though not a surprise, the CFPB’s report portends more intense regulatory scrutiny at a time when Buy-Now-Pay-Later faces increasing headwinds in the form of rising funding costs, weaker credit performance, and heightened competition"