CFPB’s Probe of Buy Now, Pay Later: What’s the Risk to Consumers? — Robin Nunn
In 2021, consumers spent nearly $100 billion in purchases using “buy now, pay later” (BNPL) programs, up from $24 billion in 2020 — a 316% increase. BNPL’s rise is drawing scrutiny from financial services regulators, who are concerned with the lack of specific rules for point-of-sale credit and potential risks to consumers. While Federal regulators have taken a largely hands-off approach, recent shifts signal that regulatory headwinds may be on the horizon.
In a February 15 Bloomberg Law article, my colleague Eamonn Moran and I discussed current and potential CFPB actions, as well as their ramifications. Here are the highlights:
In November 2021, the CFPB launched a probe into five major BNPL providers over concerns about risks to consumers associated with accumulating debt, regulatory arbitrage, credit reporting, and data harvesting. On January 12, 2022, the CFPB opened up public comments regarding the industry. With final responses due by the BNPL companies by March 1, and from the public shortly afterwards, it appears the CFPB has placed this project on an expedited timeline.
While the CFPB’s plans for the BNPL industry remain unclear at this early stage, many industry players are expecting additional guardrails and protections. The first areas for increased oversight may include:
Fees and dispute resolution. While many BNPL products do not assess interest or finance charges, product terms typically include late fees that can accrue. These products also lack certain consumer protections applicable to credit cards.
Consumer education and information access. While a TILA-like disclosure regime may not be appropriate, regulators could propose certain more limited disclosure standards for BNPL products.
Evaluation of a purchaser’s creditworthiness. Unlike credit cards and other more traditional consumer credit products, providers have no obligation to conduct customer credit assessments. Concerns have been raised about BNPL providers’ inconsistent use, and unclear provision, of credit-reporting information.
Cybersecurity and data harvesting. Since these products give companies access to sensitive consumer financial data (shopping behavior, payroll information, or checking account information), concerns over data privacy, consumer cybersecurity, and data harvesting are likely to be triggered.
Looking longer term, the CFPB’s potential adoption of a larger-participant rule for the unsecured consumer installment lending market could implicate certain BNPL providers and subject them to CFPB supervision. That said, the CFPB has a stacked agenda which may prove challenging in squeezing BNPL into new regulations. If so, the CFPB could use guidance and other tools to address some of the above concerns, such as making fee disclosures more standardized.
With any fast-growing industry, the interplay between technology, transformation, and regulation is a delicate balancing act. New market entrants into an already crowded BNPL space will create competition and, potentially, more consumer-friendly safeguards and terms of service. However, it also creates concerns around “high-cost debt traps” that perpetuate inequality.
Even without additional federal regulation, the digital-payments industry should expect increased scrutiny and oversight. Whether the CFPB inquiry leads to enforcement, it sends a strong signal to all fintech firms and retail partners that regulators are questioning the degree to which consumers could face risk.
Read the original February 15, 2022 Bloomberg Law article here
About Robin Nunn: Robin leads one of the country’s preeminent banking and financial services practices. She works at the intersection of law, business, and government policy. Robin’s dual background in corporate and private practice provides her with valuable insights and perspectives. Although her experiences are broad, her focus is on current issues connected to new communication technologies.
