The US Consumer Financial Protection Bureau has released a comprehensive report warning that the growing “buy now, pay later” industry needs new regulation to deal with industry practices.
CFPB Director Rohit Chopra said he has ordered staff to identify industry surveillance policies that need to be curtailed, including the collection of consumer purchase and demographic data for targeted ads. Buy-now-pay-later providers will also have to undergo regulatory scrutiny similar to credit card companies.
“It could involve some new rules, some new guidance — and more to come on that,” Chopra said in an interview on Bloomberg Television’s “Balance of Power With David Westin” after the report was released, adding that he asked the CFPB- employees come up with a variety of options to ensure that there is fair competition between buy now, pay later firms and the credit card companies. “We will make sure to take steps to prevent damage before it spreads.”
The proposals would mark the most extensive regulation yet to hit the sector, which has exploded in popularity in recent years by offering consumers ways to split purchases into smaller installments, often without charging interest. Instead, vendors make most of their money by charging merchants a fee each time a consumer uses the product at checkout.
Shares of Affirm Holdings Inc., Block Inc. and PayPal Holdings Inc. swung between gains and losses in New York, as some analysts said investors had expected more intense criticism.
“The report is less damaging than feared,” Dan Dolev, an analyst at Mizuho Securities, said in a note. While regulators “clearly identified key risks, they also commend BNPL, which is a positive sign.” Mizuho recommended buying Affirm shares on weakness, and shares in the company rose as much as 3.3 percent earlier Thursday, before falling 0.8 percent by 1 p.m.
Chopra said in a statement that some buy-now-pay-later firms “may welcome CFPB scrutiny to identify potentially problematic business practices before they cause widespread harm.” He said the agency “invites these firms to identify themselves to us if they wish to be investigated. We are considering our relevant authorities to conduct exams on a mandatory basis as well.”
The regulator also plans to identify rules to ensure providers comply with the protections Congress has already laid out for credit cards. And agency staff will suggest options for upstarts to submit their data to credit reporting agencies.
“Today represents a major step forward for consumers and honest finance, and we are encouraged by the CFPB’s conclusions following its review,” Affirm said in an emailed statement. “We will continue to engage with all of our stakeholders as we advance our mission to deliver honest financial products that improve lives.”
Some of the buy-now-pay-later companies have faced criticism because they have not been subject to the same regulatory oversight that normally applies to lenders. The Truth in Lending Act — the landmark law that requires extensive disclosures for unsecured consumer loans — only applies to those loans that require five or more payments, meaning it typically doesn’t apply to buy-now, pay-later offers that are limited to four payments.
“We are also aware that when products are intentionally or unintentionally structured to evade existing laws, it creates uneven competition,” Chopra said. “We want competition to be based on product quality, customer service and prices, not regulatory arbitrage.”
By Matt Turner, Jenny Surane
A better approach to “Buy Now, Pay Later”
Concerns are growing that the boom in short-term financing that has fueled clothing sales is plaguing a growing number of vulnerable customers with debts they cannot pay. But the concept can still benefit brands, lenders and consumers, with a few key changes.