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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Financial regulator takes aim at ‘buy now, pay later’ credit

By Michelle Singletary Washington Post

My grandmother, Big Mama, used layaway to purchase our Christmas presents.

Big Mama hated using a credit card or being indebted to anyone, so she used layaway to buy gifts for the five grandchildren she was raising.

Every payday, she would make a payment on the items held at the store until she could get everything off layaway. It was the one time of year she splurged.

The layaway strategy, which had been largely retired, is having a resurgence with modern-day features. The current “buy now, pay later” (BNPL) transactions are done over apps rather than at a store’s customer service counter. And you get the product now, rather than having to wait to pay it off.

Want that party dress for a New Year’s Eve event? No problem. Wear it now, pay for it later.

Except you might have some regrets when you realize you spent too much because you could spread the payments out.

The ease of the payment plans might be leading to more impulse purchases – not just during the holidays but all year – and that is making the Consumer Financial Protection Bureau uneasy.

Stifled under the Trump administration, the CFPB is resuming its dogged pursuit of companies offering credit products that could adversely affect consumers.

The agency was created under President Barack Obama to increase the oversight of consumer financial products.

Its top leadership moved away from that mission during President Donald Trump’s time in office, instead choosing to coddle financial companies and give in to their complaints of too much governance.

But the watchdog agency, now under President Biden’s control, has signaled it’s not to be trifled with.

To that end, the CFPB recently ordered five companies offering “buy now, pay later” credit to answer some questions about their business practices.

The CFPB has asked Affirm, Afterpay, Klarna, PayPal and Zip to collect information on the risks and benefits of the BNPL offerings.

Among other issues, the CFPB is concerned about the level of debt consumers are racking up and what data is being collected.

“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,” CFPB Director Rohit Chopra said.

BNPL credit deals allow consumers to split the payments for the purchases, typically into four interest-free installments. Fees may kick in only if payments are made late.

The BNPL credit products are popular among younger adults and lower-income consumers, and usage of the payment plans has spiked during the pandemic.

Twenty percent of Americans said they had used a BNPL payment plan in the previous 12 months, according to a poll over the summer by SurveyMonkey.

More than half of those making less than $50,000 a year said that they are interested in using the service because they would not have been able to afford their purchases otherwise, the SurveyMonkey poll found.

Despite the benefits of BNPL, 16% of consumers reported having buyer’s remorse – especially younger adults.

Those who ended up regretting their purchase cited several reasons, including that they purchased things that were ultimately unnecessary or were too expensive, according to SurveyMonkey.

“Whereas the old-style layaway installment loans were typically used for the occasional big purchase, people can quickly become regular users of BNPL for everyday discretionary buying, especially if they download the easy-to-use apps or install the web browser plugins,” the CFPB said in a release about its inquiry.

Six U.S. senators, including Elizabeth Warren, D-Mass., the architect of the CFPB, called for strengthening oversight of BNPL products and providers.

“While the emergence of BNPL as affordable small-dollar credit has potentially provided an alternative to more costly forms of credit, these products also have the potential to cause consumer harm,” the lawmakers wrote in a letter to the CFPB this month.

“BNPL products generally do not receive all of the protections credit cards have, including those governing ability-to-repay, monthly statements, reasonable and proportional penalty fees, and the ability to raise merchant-related disputes.”

A day later, the CFPB announced it was opening a probe.

The companies the CFPB is targeting all said they welcome the scrutiny.

“We believe proportionate regulation is a good thing and set the standard by providing consumers with an interest-free, fair, and sustainable alternative to credit cards,” Klarna said in an email.

“Through this process, we believe those benefits will be made abundantly clear and will continue our work with regulators to inform them about how our products are structured, used, and benefit both consumers and retailers.”

In similar statements, the other four companies said they weren’t opposed to the CFPB’s review.

“It should be noted that Afterpay promotes and enables responsible payments by pausing accounts from future purchases if a payment is late, capping late fees, and not charging interest,” the company said in a statement.

They all touted efforts to be transparent.

“For nearly a decade, Affirm has been advancing its mission to deliver honest financial products that improve lives, and we have never charged a late or hidden fee, ever,” the company said in a statement.

In a 16-page order, the CFPB asked for a great deal of information, including the total number and amounts of BNPL transactions, whether customers are automatically enrolled in autopay arrangements that might lead to overdraft charges, how many defaults the companies are experiencing and what information is reported to the credit bureaus.

The CFPB said it will publish its findings.

Even if this examination doesn’t result in new regulations for the buy-now-pay-later industry, it should put all financial firms on notice: A more aggressive, responsive CFPB is back, baby, placing consumers’ interests first.