One theme emerging in the Consumer Financial Protection Bureau’s request for public comments about buy now/pay later loans is that consumers need clarity over what they're getting into.
The CFPB recently sought public input about the BNPL industry from all quarters, following a
Responses fell into two general camps. Groups representing banks, credit unions and consumer advocacy groups argued that BNPL loans may drive consumers deeper into debt and that BNPL fees and return policies are inconsistent and not clearly understood.
Backers of BNPL providers touted the built-in consumer protections of the BNPL business model, which includes real-time assessment of a borrower’s ability to repay loans for specific items. BNPL providers also said they routinely cut off borrowers from further loans if they miss a payment, limiting their ability to rack up big debts.
The targeted companies were required to answer a battery of questions that were due March 1, while the public comment period ended March 25. The CFPB has not said when or if it may take any action.
"It seems almost certain that BNPL providers will eventually be required to provide more disclosures, to ensure there's full transparency for consumers using these services," said Nathan Hilt, a managing director at the consulting firm Protiviti.
The most strident public comments requesting tougher BNPL rules came from a coalition of 77 consumer advocacy groups including the National Consumer Law Center, the Consumer Federation of America and the Center for Responsible Lending.
“We urge the CFPB to view BNPL products as credit cards covered by the Truth in Lending Act, to enact a larger participant rule to supervise this market, and to look out for practices that harm consumers,” the coalition said in its letter.
The Electronic Transactions Association, whose 500 global members include banks, acquirers, card networks and fintechs, did not go as far.
“BNPL products are subject to existing robust regulation,” the Washington-based nonprofit said, noting that the common “Pay in 4” BNPL loan model — where payments are spread into four segments due every two weeks — is already compliant with anti-money-laundering, privacy and electronic fund transfers rules enforced by the CFPB, the Federal Trade Commission and numerous state regulators.
Many states' attorneys general signed one public comment letter highlighting areas where they say BNPL loans could harm consumers, but the group didn't recommend any specific new BNPL industry regulations.
“We have concerns about new and supposedly innovative financial products that promise to disrupt and democratize the industry but push consumers into cycles of debt and carry some of the same terms and features as other expensive and predatory financial products,” said the letter from the coalition of attorneys general from 21 states including California, New York, Pennsylvania, Illinois, North Carolina and Michigan.
The attorneys general also flagged the inconsistency of BNPL product features including fees and interest charged by certain providers, the lack of robust underwriting to ensure consumers’ ability to repay loans, uncertainty surrounding returns and refunds and partnerships between for-profit schools and BNPL providers.
The Consumer Financial Protection Bureau has ordered Affirm, Afterpay, Klarna, PayPal and Zip to provide information about the potential risks their products pose.
The American Bankers Association said in its letter that BNPL lenders typically extend loans with minimal information, which could expose borrowers to broad risks. “Without an assessment of creditworthiness, consumers may accumulate unsustainable BNPL debt, adversely affecting their ability to meet these and other financial obligations, which would have negative spillover effects on consumers’ financial health,” the ABA said in its letter to the consumer bureau.
The Credit Union National Association suggested that the BNPL industry’s rapid growth could harm the financial services industry.
“Some of these [BNPL] products and services are truly new while others may merely repackage traditional products and services wrapped in a thin veneer of technology and supported by venture capital that allows for pricing that undercuts traditional service providers in order to rapidly gain market share,” CUNA said in its letter.
The Financial Technology Association, whose members include three of the five BNPL fintechs singled out in the CFPB’s industry inquiry — plus other fintechs including Plaid, MoneyLion and Stripe — said BNPL loans meet an urgent consumer need for younger and lower-income consumers who may lack access to traditional credit to obtain simple, interest-free financing.
“BNPL solutions solve pain points associated with traditional payment options including high-cost revolving debt, harmful credit checks and over-indebtedness,” the FTA said in its letter, noting that BNPL lending currently represents less than 1% of U.S. retail payments.
Representatives from Klarna and Afterpay have previously said the majority of their customers don’t incur late fees.
The CFPB’s call for public comments generated little direct input from consumers. One consumer, Erica Paige, described successfully using Afterpay to make a few online purchases with no interest or fees. “I did spend more money than usual because it was so easy,” Paige noted.
An estimated 100 million consumers have used one of the instant loans offered at the point of sale so far, and fewer than 6,000 consumer complaints have been filed with the Better Business Bureau to date. Since the loans' inception, relatively few consumers have complained directly to the CFPB about buy now/pay later loans,
