Concern about accumulating debt, regulatory arbitrage, data harvesting, and other components associated with “buy now, pay later” (BNPL) plans has led the federal consumer financial protection agency to open an inquiry into the quickly expanding market, the agency said Thursday.
Meanwhile, the credit-reporting agency Equifax announced over the weekend that it intends to add an element of BNPL plans (installment repayments) to its credit statements, filling what has become a blind spot for lenders.
In a release, the Consumer Financial Protection Bureau (CFPB) said it has issued a series of orders to firms – including Affirm, Afterpay, Klarna, PayPal, and Zip – that are using the BNPL plans to collect information about the risks and benefits of the BNPL plans which the bureau referred to as loans.
The bureau described BNPL as a type of deferred payment option that generally allows the consumer to split a purchase into smaller installments, typically four or fewer, often with a down payment of 25% due at checkout.
According to the CFPB, “the application process is quick, involving relatively little information from the consumer, and the product often comes with no interest. Lenders have touted BNPL as a safer alternative to credit card debt, along with its ability to serve consumers with scant or subprime credit histories.”
Bureau Director Rohit Chopra described BNPL as a new version of old layaway plans, with the twist that where the consumer gets the product immediately, but gets the debt right away too.
The bureau contended that merchants are adopting BNPL programs and are willing to typically pay 3% to 6% of the purchase price to the companies. The agency said that’s similar to credit card interchange fees, because consumers often buy more and spend more with BNPL.
“Indeed, BNPL’s use has spiked during the COVID-19 pandemic and throughout the holiday shopping season,” the agency stated. “More and more Americans are using it, and the most recent Black Friday and Cyber Monday shopping weekend saw massive growth in BNPL. This explosive growth has caught the eye of many investors, including significant venture capital money. Big tech companies are also entering the arena.”
The agency also alleged that BNPL has grown internationally and that many other countries (including Australia, Sweden, Germany and the UK) are also taking a close examination of its providers. The agency said it is working with those companies – as well as the Federal Reserve and state regulatory agencies – about the issue.
Equifax said it will begin recording installment plans that allow shoppers to make four biweekly payments instead of covering the full cost at checkout, often from online sources. Those particular plans have become very popular with shoppers, as they require a low down payment followed by three additional plans over time (known as “pay in four” plans).
But the payment plans do not typically show up on credit reports, which means financial institutions do not receive a clear picture of the risk the consumer has accumulated.
The credit reporting agency said that more than 45 million people in the U.S. are expected to use BNPL services in 2021.