What happened

Buy Now, Pay Later (BNPL) is a form of deferred payment option in which the consumer is usually able to purchase a product in installments at a low, often zero interest rate, with the merchant subsidizing the financing. through interchange. BNPL is typically given by third party vendors rather than the vendor itself, making it a loan rather than a credit sale. Most BNPL plans do not charge interest but may include late fees and other fees. Additionally, 0% APR BNPL plans are often structured with four or less installments, and therefore disclosures under the Truth in Lending Act (TILA) are not triggered. BNPL credit is granted on an instant point-of-sale subscription basis, and it often allows consumers with limited credit histories to purchase products that they might not otherwise be able to purchase.

The Dodd-Frank Act, section 1022 (c), obliges the CFPB to monitor consumer financial markets and allows the agency to require market participants to submit information to inform such oversight. The CFPB is required to publish at least one report of its aggregated findings on the lessons learned from this investigation. Today’s deposit order information is intended to inform the range of these consumer credit products and their underlying business practices. In announcing the investigation, the Bureau expressed concern about the absence of TILA and other disclosures relating to credit cards. The announcement also indicates concerns about late fees, as well as charges imposed by a consumer’s bank. In addition, the CFPB is concerned about the explosive popularity of BNPL, which is translating into equally explosive debt growth, especially for young consumers.

The BNPL product has experienced international growth and many other countries are also looking closely at its suppliers. As part of today’s investigation, the Bureau is working with its international partners in Australia, Sweden, Germany and the UK, in particular the Financial Conduct Authority. The Office will also coordinate with the rest of the Federal Reserve system, as well as with its state partners.

Why is this important

Is the CFPB aiming for one of the most user-friendly innovations on the market? BNPL’s programs have enabled millions of consumers to purchase products they could not otherwise afford, on favorable financial terms. In serving these orders, the Bureau has publicly expressed concerns that consumers are racking up more debt than they can ultimately afford. In particular, the CFPB suggests that a consumer may make multiple purchases over multiple hours with multiple businesses and may ultimately incur additional costs if they are unable to make all payments, and therefore pay. more than planned.

The Bureau has also expressed concern about what it calls “regulatory arbitration”. According to the Bureau, some BNPL companies may inadequately assess which consumer protection laws apply, whether certain disclosures are required, and whether certain protections that apply to credit cards apply to BNPL products, and what fees may be charged . For example, the Bureau noted that BNPL’s products may not offer the dispute resolution protections required for products such as credit cards.

Finally, the Bureau noted concerns regarding data collection by BNPL lenders. The CFPB says some companies have used this collected data to create closed-loop shopping apps with partner merchants, pushing specific brands and products, often aimed at younger audiences. The Bureau says it is seeking to better understand how this data collection is used to engage in behavioral targeting and data monetization.

The Bureau’s investigation appears to represent a significant departure from its previous comment about BNPL, possibly signaling an intention to regulate the product directly or through law enforcement. Although the issuance of these orders is strictly speaking a “market surveillance” activity, the Bureau can use the information for any purpose. Thus, this data collection could be used in the development of roadmaps for the application of the UDAAP. Regulators hate the regulatory vacuum, and BNPL’s rapid growth, especially given the limited information about some of these plans, has clearly caught the CFPB’s attention.