The CFPB Takes Aim at Buy Now, Pay Later

On December 16, the Consumer Financial Protection Bureau (“CFPB”), led by newly confirmed Director Rohit Chopra, announced it was opening an inquiry into “buy now, pay later” products and 5 providers in particular – Affirm, Afterpay, Klarna, PayPal, and Zip. To that end, the CFPB sent an order each of the 5 companies listed above, seeking information regarding their business practices, differing models, and customer bases.

Buy now, pay later products – BNPL for short – offer consumers a deferred payment option when making a purchase at the point of sale. Rather using a consumer’s debit card or open end line of credit to complete a purchase, a consumer can instead borrow the transaction amount from the provider to complete the purchase and then repay that provider over time in installments. BNLP services have become increasingly popular in recent years and, as of 2021, represented nearly $100 billion in e-commerce transactions globally.[1]

Critics of BNPL services have grown in tandem with their popularity and it is notable that the CFPB’s inquiry comes on the heels of the agency’s receipt of a letter from 6 Democratic Senators asking the CFPB to look into alleged BNPL abuses.

The CFPB itself, in its announcement accompanying the orders, cited a number of business practices related to BNPL products that the CFPB finds concerning, including:

• Accumulating Debt – the CFPB is concerned about the possibility of consumers becoming regular users of BNPL services for everyday discretionary spending and thereby potentially being caught in a cycle of debit.
• Regulatory Arbitrage – the CFPB is concerned that some BNPL providers may not be adequately evaluating what consumer protection laws apply to their products and that certain protections afforded to credit cards (e.g., error resolution) may not apply to BNPL services.
• Data Harvesting – the CFPB is concerned that the consumer information and payment histories collected by BNPL providers could pose risks to customers in the future and, therefore, the CFPB is seeking a better understanding of how BNPL companies collect and monetize data and engage in behavioral targeting.

Given the CFPB’s sensitivity around credit products in general, and consumer credit products in particular, it is possible and maybe even likely that these orders are the first step towards the CFPB taking formal enforcement actions against BNPL providers and / or proposing targeted rules and regulations at the BNPL industry. We will be monitoring this area for additional updates in the coming weeks and months.

The CFPB’s announcement of its inquiry, together with a sample order, can be found here.

A copy of the Senators’ letter to the CFPB can be found here.

[1] Brown, Ryan, How buy now, pay later became a $100 billion industry, cnbc.com, Sept. 21, 2021, available at https://www.cnbc.com/2021/09/21/how-buy-now-pay-later-became-a-100-billion-industry.html.