Consumer watchdog plans to regulate ‘buy now, pay later’ credit card companies

The US Consumer Financial Protection Bureau plans to subject “buy now, pay later” lenders to the same active supervision as credit card companies, saying the short-term finance industry is harvesting consumer data in ways that threaten consumer privacy.

An alternative to traditional credit cards, the buy now, pay later model allows consumers to pay off the loan in few, often four, interest-free increments. The service, offered by a host of companies like Klarna and Afterpay, has grown in popularity during the pandemic.

CFPB officials said the consumer watchdog, which does not currently regulate the industry, plans to issue guidelines to supervise lenders and subject them to supervisory tests.

“Buy Now, Pay Later companies collect and leverage data in ways we don’t see with other companies,” CFPB Director Rohit Chopra told reporters on a conference call on Wednesday. “Through their proprietary interfaces, they can tell which products we’re buying by product placement.”

The bureau also noted a rise in loan approval rates in a report released on Thursday after a nearly year-long investigation. Outfit and beauty retailers accounted for more than 80% of usage in 2019 but only 58.6% in 2021 as more consumers used buy now and pay later for services like travel, pet care, groceries and gas.

More clients are also approved for loans. In 2021, 73% of applicants were approved, compared to 69% in 2020, according to the report.

The bureau has identified several risks to consumers who use buy now, and pay off loans later, including a lack of consumer protection compared to traditional credit card companies, data collection and monetization of customer data, debt accumulation and “loan hoarding” – or access to Multiple loans at the same time.

Late fees are also becoming more common. The CFPB found that 10.5% of unique users were charged at least one late fee in 2021, compared to 7.8% in 2020. And adoption of the service is growing across all age groups, according to Chopra.

The CFPB first announced its investigation into the industry in December 2021.

The office can oversee a particular purchase now, and pay later to the service provider under certain conditions, but corporate licensing also varies from state to state. Chopra asked the CFPB to take a number of steps toward mitigating risks associated with the industry, based on the report.

“We want to make sure that the buy now, pay later companies are subject to proper scrutiny just like normal credit card companies,” Chopra said.

The CFPB will define how the credit card industry integrates buy now and pay later features. He said staff will also identify customer monitoring procedures that may need to be scaled back.

In general, companies will undergo appropriate supervisory tests in line with regular credit card agencies, Chopra said, but the proposed changes are ultimately the responsibility of individual companies.

“We’ll leave it up to the companies to decide what they think is the best haven,” a CFPB official told reporters this week.

In an analysis released Thursday, credit rating firm Fitch Ratings said buy-now-pay-later businesses offer a more flexible financing option for low-income shoppers and that the “pay in four installments” model, in particular, is here to stay. But analysts caution that the various risks associated with the services are worth scrutinizing.

Mike Taiano, a senior official, said: “While the CFPB report was not surprising, it does portend further intense regulatory scrutiny at a time when Buy-Now-Pay-Later faces mounting headwinds in the form of rising financing costs, and weak credit performance. and increasing competition. Fitch Ratings Manager.

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