In a shot across the bow to the buy now, pay later (BNPL) industry, the U.S. Consumer Financial Protection Bureau (CFPB) today issued a report suggesting that companies like Klarna and Afterpay, which allow customers to pay for products and services in installments, must be subjected to stricter oversight.
The CFPB -- in a step toward regulation -- plans to issue guidance to oversee BNPL vendors and have them complete "supervisory" exams in line with credit card company reporting requirements, according to agency officials speaking at a presser this week.
The CFPB first announced that it would investigate the burgeoning (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 U.S., it didn't previously regulate BNPL providers, who argued that they were exempted from many of the existing rules governing consumer lending.
BNPL services like Affirm and Apple's forthcoming Apple Pay Later usually split up purchases into four or six equal installments over a fixed short-term period (e.g., a few months). Many don't charge any interest or late fees, and don't require a credit check for customers to qualify.
In the course of its investigation, the CFPB said that it found BNPL vendors are approving more customers for loans -- 73% in 2021 compared with 69% in 2020 -- and that delinquencies on these services are rising sharply. Meanwhile, the BNPL industry’s charge-off rate, or the rate of uncollectible loans, was 2.39% in 2021 -- up from 1.83% in 2020.
Late fees are also climbing. The CFPB found that 10.5% of customers were charged at least one BNPL late fee in 2021 versus 7.8% in 2020.
CFPB director Rohit Chopra outlined the other dangers of BNPL offerings during the call, including data harvesting and taking on multiple large loans at once. (Because BNPL firms typically don't report to credit bureaus, it's easier for consumers to take out loans from multiple vendors at once.) These will likely become more acute as people begin to use BNPL for routine expenses, the agency said; the CFPB found that BNPL customers are increasingly paying for purchases like groceries and gas, spurred by macroeconomic pressures, including inflation.
"[BNPL] firms are harvesting and leveraging data in ways we don’t see with other companies," Chopra said, per CNBC's reporting. "Through their proprietary interfaces, they can see which products we buy through product placement ... “We want to ensure [BNPL] firms are subjected to the appropriate examination just like regular credit card firms."
The Financial Technology Association, an industry trade group, pushed back against the allegations that BNPL could harm consumers if left unregulated -- arguing that BNPL as it exists today provides a valuable alternative to other lines of credit.
"With zero to low-interest, flexible payment terms, and transparent terms and conditions, BNPL helps consumers manage their cash flow responsibly and live healthier financial lives," Financial Technology Association CEO Penny Lee told the Associated Press in a statement.
Some data would suggest otherwise. A DebtHammer poll showed that 32% of customers skip out on paying rent, utilities or child support to make their BNPL payments, and BNPL services can also lead to bigger 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 flirted with regulations for some time, with the U.K. last year announcing new regulatory policies for BNPL companies. California sued Afterpay after it initially refused to obtain a lender’s license from the state. Elsewhere, Massachusetts regulators entered into a consent agreement with Affirm after allegations that it engaged in loan servicing activity without a license.