The CFPB is coming for ‘buy now, pay later’
Good morning, and welcome to Protocol Fintech. This Thursday: the CFPB lays out its “buy now, pay later” plan, Walmart preps its banking products and PayPal sees some arrivals and departures.
Credit rules where credit rules are due
Diners Club got its start offering a no-interest credit line to restaurant diners who wanted to pay off their purchases over time. If that sounds a lot like “buy now, pay later,” Consumer Financial Protection Bureau director Rohit Chopra agrees. He dismissed the consumer-credit phenomenon as a “vague marketing term” applied to existing credit products. And he doesn’t think pay-later companies should be treated any differently than a credit card when it comes to applying consumer protections.
Chopra’s top concern with “buy now, pay later” is how providers use customer data. The companies say that they collect data that credit bureaus don’t so that they can underwrite customers other lenders can't.
But the CFPB is concerned about how the companies might also use that data for marketing purposes. Data about individual users’ attitudes and habits could be used to sell them specific brands’ products. It could also engender repeat usage of “buy now, pay later,” leading to overextension of credit, the report states.
“In the U.S. we have generally had a separation between banking and commerce. But as Big Tech-style business practices are adopted in the payments and financial services arena, that separation can go out the door,” Chopra warned.
The CFPB’s biggest focus is on how data can be used to generate more revenue, Chopra told Protocol in a briefing.
The CFPB is also concerned consumers are getting tricked by pay-later providers. The agency listed a slew of potential consumer harms related to whether or not customers know what they’re signing up for.
The industry is already preparing a defense to these claims. A trade group-commissioned Morning Consult poll released earlier this week found that 94% of users believe they understand the terms and conditions of “buy now, pay later” offers.
The CFPB’s report found that pay-later providers are not adequately transparent about terms, are forcing consumers to enlist in automatic payments and that at least one company tacked multiple sneaky late fees onto a single missed payment.
The report also said that BNPL companies were making it difficult for users to dispute charges and repeatedly presented failed charges, which can result in multiple overdraft fees from banks.
This type of consumer manipulation adds to the risk of overextension, the report states. Back-to-back use of “buy now, pay later” and “loan stacking,” or the use of multiple credit lines at the same time, are two of the ways users might find themselves taking on more debt than they can afford.
It’s decision time for the CFPB. Though Chopra didn’t explicitly outline any forthcoming rules, he listed next steps he has asked CFPB staff to pursue.
Forthcoming guidance will explain how “buy now, pay later” companies can and should adhere to consumer protections required of credit card companies, like TILA or the CARD Act. Staff will also work with new market entrants to ensure they are compliant from the start.
Rules will also outline which data collection processes are problematic and prohibit them. Chopra said he wanted staff to examine the use of demographic, transactional and behavioral data. The CFPB will coordinate on this with the FTC, which has already launched a process to design guardrails on commercial surveillance.
Rules will address how “buy now, pay later” companies can and should report data to credit bureaus. Chopra said this is one area where companies “may welcome CFPB examination” — probably because several have already been trying to figure it out on their own.
Last, rules will help ensure “buy now, pay later” lines are accounted for when the CFPB and Federal Reserve estimate average household debt. “It’s critical that this category does not hide in the shadows,” Chopra said.
The CFPB’s research into “buy now, pay later” does not stop here. New pay-later companies are getting started constantly, including new market entrants that help people purchase guns, health care and business expenses, bringing with them additional concerns. The question is whether the CFPB can write rules fast enough and effectively enough to keep the growing industry in line — or whether regulators will find themselves playing a game of cat-and-mouse with fintechs.
Protocol link: https://www.protocol.com/newsletters/protocol-fintech/cfpb-bnpl-rules