In a shot at the buy now, pay later (BNPL) industry, the U.S. Consumer Financial Protection Bureau (CFPB) released a report today suggesting that companies like Klarna and Afterpay, which offer customers products and services in installments can pay , should be more strictly controlled.
The CFPB plans to issue guidelines – in a step towards regulation – to supervise BNPL suppliers and have them take “supervisory” exams in line with credit card company reporting requirements, according to to agency officials speaking to a press this week.
The CFPB first announced it would investigate the nascent (but rocky) BNPL industry in December 2021. While the agency has jurisdiction over banks, credit unions, securities firms and other financial services firms based in the US, it has not previously regulated BNPL providers, who argued they were exempt from many of the existing consumer lending rules.
BNPL services like Affirm and Apple’s upcoming Apple Pay Later usually split purchases into four or six equal installments over a fixed short term (say, a few months). Many do not charge interest or late fees and do not require a credit check for customers to qualify.
In the course of its investigation, the CFPB said it found that BNPL providers are clearing more customers for loans – 73% in 2021 compared to 69% in 2020 – and that delinquencies on these services are rising sharply. Meanwhile, the BNPL sector’s amortization rate, or the percentage of non-performing loans, was 2.39% in 2021 – up from 1.83% in 2020.
Late fees are also rising. The CFPB found that 10.5% of customers were charged at least one BNPL late fee in 2021, up from 7.8% in 2020.
CFPB director Rohit Chopra outlined the other dangers of BNPL offerings during the call, including data collection and taking on multiple large loans at once. (Because BNPL companies typically don’t report to credit bureaus, it’s easier for consumers to take out loans from multiple suppliers at once.) These are likely to become more acute as people start using BNPL for routine spending, the bureau said; the CFPB found that BNPL customers are increasingly paying for purchases such as groceries and gasoline, spurred by macroeconomic pressures, including inflation.
“[BNPL] companies collect and use data in ways we don’t see with other companies,” Chopra said, according to CNBC’s reporting. “Through their own interfaces, they can see what products we buy through product placement… “We want to make sure [BNPL] companies are subject to proper scrutiny, just like regular credit card companies.”
The Financial Technology Association, an industrial trade group, has resisted allegations that BNPL could harm consumers if left unregulated – arguing that BNPL as it exists today offers a valuable alternative to other lines of credit.
“With zero to low interest rates, flexible payment terms and transparent terms, BNPL helps consumers responsibly manage their cash flow and live healthier financial lives,” CEO Penny Lee of the Financial Technology Association told the Associated Press in a statement.
Some data suggests otherwise. A Debt Hammer opinion poll showed that 32% of customers do not have to pay rent, utilities or child support to make their BNPL payments, and BNPL services can also lead to larger purchases. In May, SFGate reported that the average Affirm customer spends $365 on a single purchase, as opposed to the $100 average cart size recorded in 2020.
The BNPL industry has been flirting with regulation for some time now, with the UK announcing new regulatory policies for BNPL companies last year. California sued Afterpay after initially refusing to obtain a lender from the state. Elsewhere, Massachusetts regulators entered into a consent agreement with Affirm after allegations that it was handling loans without a license.