CFPB Probes Big Five Buy Now, Pay Later Providers Over Data Use, Debt Accumulation

The Consumer Financial Protection Bureau (CFPB) opened on December 16 an inquiry into Buy Now, Pay Later (BNPL) to better understand the risks and benefits of this payment instrument.

The CFPB issued orders to Affirm, Afterpay, Klarna, PayPal and Zip to gather detailed information about consumers´ shopping behavior, fees, loan performance, users´ demographics, data collection and other elements of their business models. The companies have until March 1, 2022 to send the information to the CFPB.

CFPB Director Rohit Chopra is concerned about the quick accumulation of debt for consumers using this instrument. “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 Chopra.

BNPL is still unregulated in the U.S., as well as in many other countries, and regulators around the world are concerned that consumers may not receive the same protection when they use this method of payment as when they use credit cards and other payment instruments.

The announcement comes one day after six U.S. senators, including Elizabeth Warren, wrote a letter to the CFPB urging it to look into potentially abusive practices in the industry.

The inquiry launched by the CFPB is a market-monitoring order, and given the nature of this proceeding, it is unlikely that any of the companies receive any sanction at the end of it. However, the findings could be used by the regulator, at a later stage, to propose regulation or issue new orders.

The CFPB will focus on three areas of BNPL. First, on accumulation of debt. The regulator is concerned that consumers may spend more than they anticipated, and this may result in charges and fees if the user doesn´t have enough money in their bank account. As consumers can easily download apps from different companies and start using BNPL to make multiple purchases, it may be hard to keep track of all the payments, especially among younger consumers.

See also: Banks Can Win at BNPL If They Play to Their Strengths

The second area of focus is regulatory arbitrage. In view of the regulator, some BNPL companies may not be evaluating what consumer protection laws apply to their products. Some of the potential concerns include not adding the appropriate disclosures for BNPL products, or not offering dispute resolution protections for users.

The last area is data harvesting. The CFPB is concerned that BNPL lenders use the consumer’s data to create closed-loop shopping apps with partner merchants, pushing specific brands and products. While there is nothing wrong with using the data collected in an app or the user’s payment history to provide targeted advertising or to promote certain products, this line of inquiry resembles to the kind of practices probed by antitrust regulators against big tech companies.

BNPL is, perhaps, one of the financial products where the line between FinTech and tech companies is becoming thinner. Affirm recently announced a deal with Amazon, and other tech companies could still enter in a market that is unregulated. If the regulator confirms that the data collected by BNPL lenders is used for behavioral targeting and poses a risk for consumers, it may be wary of further entrance of big tech firms in this space. The amount of data that big tech companies possess over consumers’ habits could allow them to shift shopping behaviors, potentially resulting in an accumulation of debt, which is precisely one of the main concerns stated by the CFPB.

BNPL is under scrutiny by regulators around the world, and this is probably the reason why the CFPB is working together with peers in Australia, Sweden, Germany and the U.K. where regulation and/or market studies are underway. The collaboration with the U.K.´s Financial Conduct Authority may be particularly strong given that the same companies operate in both countries; the U.K. regulator launched a similar inquiry in October with a deadline for stakeholder´s responses set for January 6. The CFPB´s Chopra was a commissioner at the Federal Trade Commission, where collaboration with foreign antitrust authorities is customary for market studies, antitrust cases and merger reviews, before being appointed director of the consumer bureau.

See also: BNPL Under Global Regulatory Scrutiny, With UK As Likely Frontrunner