Orders to collect information on the risks and benefits of these loans went to Affirm, Afterpay, Klarna, PayPal, and Zip.
The Consumer Financial Protection Bureau is concerned about accumulating debt, lack of consumer protection, and data harvesting in a consumer credit market quickly changing with technology.
“Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too,” said CFPB Director Rohit Chopra.
Buy now, pay later credit is a deferred payment that allows a consumer to split a purchase into smaller installments, usually four or less, often with a down payment of 25 percent due at checkout. The process is quick, requiring little information from the consumer, and often comes with no interest.
Lenders contend buy now, pay later is a safer alternative to credit card debt, along with its ability to serve consumers with little or subprime credit histories.
Merchants are adopting buy now, pay later programs and are willing to often pay 3 to 6 percent of the purchase price to the companies, similar to credit card fees, because consumers often buy more and spend more with buy now, pay later.
During the covid-19 pandemic, the use of buy now, pay later has spiked and it’s also grown during the holiday season. More Americans are using it, and the most recent Black Friday and Cyber Monday shopping weekend saw massive growth in buy now, pay later. This growth has caught the attention of investors, including venture capital money and big tech companies.
The CFPB will publish findings from its inquiry.
The agency said it’s concerned about:
- Accumulating debt: While old-style layaway installment loans were often used for an occasional big purchase, consumers can quickly become regular users of buy now, pay later for everyday buying, especially if they download the easy-to-use apps or install the web browser plugins. If a consumer has a lot of purchases on many schedules with many companies, it can be hard to keep track of when payments are due. Then, when there isn’t enough money in a consumer’s bank account, charges may be made by the consumer’s bank and the buy now, pay later company. Because getting these loans is easy, consumers may end up spending more than they’d planned.
- Consumer protection: Some buy now, pay later companies may not be determining correctly what consumer protection laws apply to what they sell. For example, some buy now, pay later products don’t provide certain disclosures, which could be required by law. And while the buy now, pay later application may look similar to a standard checkout with a credit card, protections that apply to credit cards may not apply to buy now, pay later purchases. Many buy now, pay later companies don’t provide dispute resolution protections available to users of other type of credit, such as credit cards. And, depending on what rules the lender is following, different late fees and policies apply.
- Data harvesting: Buy now, pay later lenders have access to the payment histories of their customers. Some have used this collected data to create shopping apps with partner merchants, pushing specific brands and products, often geared toward younger audiences. As competitive pressure grows, lenders will need to find other sources of revenue to maintain growth and profitability. The CFPB wants to better understand practices around data collection, behavioral targeting, data monetization, and the risks they can create for consumers.
Many other countries are examining buy now, pay later. As part of the CFPB’s inquiry, the agency is working with Australia, Sweden, Germany, and the United Kingdom. The CFPB also is coordinating with other agencies in Federal Reserve System, as well as state agencies.
More information about buy now, pay later, see “Know Before You Buy (Now, Pay Later) This Holiday Season.”