The explosion in buy now, pay later point-of-sale lending was bound to catch the eye of regulators sooner or later, and on Thursday the other shoe dropped with a letter sent to five leading BNPL firms from the Consumer Financial Protection Bureau requesting information on their services. The five—Affirm Inc., Afterpay Ltd., Klarna AB, PayPal Holdings Inc., and Zip Co.—have until March 1 to respond to the order. Afterpay has agreed to be acquired by Block Inc. (formerly Square Inc.) in a $29-billion deal expected to close early next year.
The bureau is demanding data related to three main areas of concern, including the potential for overspending by consumers who rely too heavily on the readily accessible point-of-sale credit offered by the BNPL apps. “Whereas the old-style layaway installment loans were typically used for the occasional big purchase, people can quickly become regular users of BNPL for everyday discretionary buying, especially if they download the easy-to-use apps or install the web browser plugins,” the regulator’s letter notes.
Other concerns include the potential for BNPL credit to fall outside of consumer-protection rules that apply to other lending products. That opens the potential for lenders to collect and use data gathered from consumers’ BNPL transactions in ways not allowed for credit card and other credit transactions, according to the CFPB.
The agency’s order to the five major providers follows a letter sent earlier this week by six U.S. Senators to Rohit Chopra, the CFPB’s director, asking the agency to initiate a review of BNPL products with a view toward introducing consumer protections. All six Senators are Democratic members of the Committee on Banking, Housing, and Urban Affairs.
BNPL has been around for years, but the number of providers has increased recently as consumers respond favorably to the product in the wake of the pandemic. Speaking in October at the Money 20/20 exposition in Las Vegas, Rick Cunningham, senior vice president for strategy and business development at Alliance Data Systems Corp., estimated the market potential at $100 billion, with just $4 billion to $6 billion having been lent so far.
BNPL loan terms can vary, but typically the loans are available immediately online or in the store and allow four interest-free installments over a six-week period. With BNPL’s fast-growing popularity among consumers, “it’s no surprise whatsoever that the CFPB is taking a run” at it, says Eric Grover, principal at the Minden, Nev.-based payments consultancy Intrepid Ventures. “It’s an irresistible target.”
Grover says regulatory clarity “would be a good thing,” in view of the fast rise of the credit product and the fact that most of that history has emerged in a time of strong economic performance in the United States. “The BNPL programs haven’t been tested by an unpleasant credit cycle,” he says.
The new rules, when final, will likely result in “constraints on the economics of the programs,” Grover adds. While consumers pay no interest if they make their installment payments on time, merchants pay transaction fees that can be higher than discount fees on credit cards, Grover notes, with percentages ranging as high as 6% for smaller sellers.
For that reason, Grover says, any regulatory effort bears watching, including the CFPB’s developing interest. “If I’m Afterpay or Klarna or PayPal, I’m paying close attention to this,” he says.
Indeed, the CFPB’s action Thursday signals a tougher approach to payments and other financial services by Washington regulators, observers say. “The regulatory environment has shifted with the new administration. We can expect more scrutiny on fintech products and financial services in general, and this is one of the first signs of that,” says Ben Jackson, chief operating officer of the Innovative Payments Association and writer of the monthly Payments 3.0 column in Digital Transactions magazine, in an email message. “The data request most likely will lead to new regulations being written in 2022. Companies will need to be ready to have conversations with regulators about their business, the benefits to consumers, and how they are protecting people from harm.”