CFPB Inquiry Comes as Short-Term Finance Products Gain Popularity
The Consumer Financial Protection Bureau (CFPB) has announced an inquiry into the practices of the Buy Now, Pay Later (BNPL) industry in light of the popularity of products such as Klarna and Afterpay. The move comes as the major credit bureaus are adding information from Buy Now, Pay Later to credit reports.
In a blog post explaining the inquiry, Ashwin Vasan of the CFPB says:
Use of BNPL has seen astronomical growth. Companies like Affirm, Afterpay, Klarna, PayPal, and Zip (formerly Quadpay) have become almost ubiquitous in the retail market since the pandemic. This past holiday season, usage spiked even higher, especially among young people.
Cause for Concern?
Vasan says the BNPL space can seem innocuous but could be problematic for consumers:
For the buyer, it may seem like they are getting something for nothing. And it can be appealing because not only is it convenient but instead of an upfront cost of $100, they pay $25. But we are concerned there may be some systemic, underlying problems, particularly around accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology. For some people, BNPL could look like a standard payment method when they are really taking on a new form of debt.
In fact, the CFPB has indicated the inquiry now is about risk assessment:
“Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too,” said CFPB Director Rohit Chopra. “We have ordered Affirm, Afterpay, Klarna, PayPal, and Zip to submit information so that we can report to the public about industry practices and risks.”
While there are some benefits to BNPL, consumer advocates warn that using the products comes with certain risks — including fees for late payments:
Lauren Saunders of the National Consumer Law Center (NCLC) says of these products:
“Buy-now-pay-later products, if affordable and truly free to the consumer, may help consumers manage larger purchases without the long-term debt and high costs of credit cards. But some BNPL products may have deceptive and abusive profit models built on the expectation of late fees from struggling consumers.
It’s also important to understand the impact these products may have on a consumer’s credit score.
Trina Paul, writing for CNBC, notes the ways these products may negatively impact a consumer’s credit score.
“If reported, a missed payment can be noted on your credit report for up to seven years and will negatively impact your credit score,” says Rod Griffin, the senior director consumer education and advocacy at Experian.