The CFPB’s Buy Now, Pay Later Report Offers a Regulatory Outline, But No Sweeping Overhaul

Long anticipated, a report from the Consumer Financial Protection Bureau offers suggestions on how regulation might aid the buy now, pay later industry, but doesn’t recommend a wholesale review of its practices.

Among the risks outlined in the “Buy Now, Pay Later: Market trends and consumer impacts” report, released Thursday, are that some BNPL providers instruct their consumer officers to “evade certain consumer lending requirements.” The CFPB picked up what it sees as a lack of standardized disclosures, such as the cost of credit, a piece of information required by Regulation Z, which standardizes how this cost is disclosed to consumers.

The report also noted disparate dispute-resolution policies. “Most BNPL lenders surveyed are currently not following Regulation Z’s credit dispute resolution provisions and consumers sometimes are required to pay loan installment amounts in dispute pending dispute resolution,” the report says. Other issues are what the CFPB labeled as the compulsory use of autopay, multiple payment re-presentments, and late fees. Other issues it found included data harvesting and overextension when consumers perhaps take multiple BNPL loans. 

Rohit Chopra, director of the Consumer Financial Protection Bureau, said the agency will begin to identity potential “interpretive guidance or rules to issue with the goal of ensuring that Buy Now, Pay Later firms adhere to many of the baseline protections that Congress has already established for credit cards.” In what could result in further regulation of the BNPL industry, the agency also will identify data-surveillance practices BNPL providers use, look for more ways on appropriate credit reporting practices for BNPL, and insist that BNPL providers are “subjected to appropriate supervisory examinations, just as credit card companies are,” Chopra said. The CFPB initiated its inquiry in December.

While regulators will continue to investigate the BNPL industry, at least one observer does not see a wholesale realignment in the offing. “It’s kind of underwhelming,” Eric Grover, principal at Intrepid Ventures, a financial-services consultancy, tells Digital Transactions News. “I think Chopra was looking for some egregious behavior to demonize these guys and clearly it’s not there,” Grover says. While acknowledging issues such as the disclosures and automated payments, Grover does not view the report as a major impetus for a new rule or regulation. 

If standard disclosures—such as those already in place for credit cards—and refinements to automated payments are required, Grover does not anticipate they would harm BNPL providers. Outside of that, however, providers might be affected. 

At least one major BNPL provider, Affirm Inc., views the report mostly positively. “The CFPB report on BNPL published today is a big step forward for honest finance and for the transparency we’ve been advocating at #Affirm for over a decade,” tweeted Max Levchin, Affirm founder and chief executive. 

In a statement, Affirm says, “Today represents a big step forward for consumers and honest finance, and we are encouraged by the CFPB’s conclusions following their review. We will continue to engage with all of our stakeholders as we advance our mission to deliver honest financial products that improve lives.”

Klarna AB, however, contested regulating BNPL products the same as credit cards. “Low-cost, low-risk, no-interest products like BNPL should not fundamentally be regulated in the same fashion as high-cost credit products which rely on consumer fees and revolving debt,” Klarna’s statement says. “As a licensed European bank, Klarna is committed to financial wellbeing and protecting consumers through industry innovation and proportionate legislation.”

And, the Financial Technology Association, a Washington, D.C.-based trade group, found the report instructive. “The fact is that consumers are choosing Buy Now Pay Later as a competitive alternative to high-interest credit products that trap them in cycles of debt,” Penny Lee, FTA chief executive, says in a statement. “We look forward to continuing working with regulators like the CFPB to advance positive consumer outcomes.” 

Some regulation may be necessary, suggests Ariana-Michelle Moore, advisor of retail banking and payments at consultancy Aite-Novarica Group. 

“I believe it is becoming necessary as consumers increasingly use BNPL,” Moore says in an email message. “If they mimicked the old layaway programs, where a consumer uses the alt lending for a single purchase, then no. It would not be necessary. But BNPL is very much mimicking the traditional lending/revolving credit product as consumers look to use this payment method for increasingly more purchases, across merchants and/or lenders.”

There are gaps in interpreting how existing regulations apply to BNPL products, she says. “The report is clearly trying to address these gaps through which the fintechs have been operating,” she says. “So yes, it’s about time, regulators look at these programs and hold them to some, if not all, of the same standards they hold other lenders (including issuers).”

Should that happen, Moore does not expect it will hinder the “true benefit of BNPL to consumers: Which is enabling consumers to make modest purchases they otherwise wouldn’t be able to make.”

The central appeal of BNPL products is the speediness of the application and the authorization decision, especially in mobile commerce, where seconds count. Additional disclosure requirements may impede that flow, potentially causing consumers to abandon the checkout process. 

“For example, will disclosures need to be shown at the POS, could this slow down transaction times at the register? (I think a close example is applying for a store card at the POS. Definitely slower than a swipe),” Moore adds.

Some observers and industry providers weren’t shocked by the CFPB’s report. 

As Zip put it in a statement, “We’re pleased the CFPB recognized the value BNPL gives to consumers, including access to credit, ease of use, and lower costs, particularly going into challenging economic times. The CFPB’s observations seem to be on balance, reasonable, and fair.”