Buy Now, Pay Later Faces Tougher Rules as CFPB Director Weighs In

The US Consumer Financial Protection Bureau has released a sweeping report warning that the growing “buy now, pay later” industry needs new regulation to tackle the industry’s practices.

CFPB Director Rohit Chopra said he has directed staff to identify surveillance policies in the industry that should be curtailed, including the collection of purchasing and consumer demographic data for targeted advertising. Buy now, pay later providers will also have to undergo supervisory examinations similar to those applied to credit card companies.

“It may include some new rules, some new guidance — and more 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 CFPB staff to come has a range of options to ensure there is fair competition between buy-now, pay-later and credit card companies. “We want to make sure we take steps to prevent damage before it spreads.”

The proposals would mark the most sweeping regulations yet to hit the industry, which has exploded in popularity in recent years by offering consumers ways to split purchases into smaller installments, often without charging interest. Instead, providers 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. they ranged between gains and losses in New York, as some analysts said investors were expecting stronger criticism.

“The report is less damaging than we feared,” Dan Dolev, an analyst at Mizuho Securities, said in a note. While the regulators “clearly identified significant risks, they also praise BNPL, which is a positive sign.” Mizuho recommended buy shares of Affirm on weakness, and the company’s shares rose as much as 3.3% earlier on Thursday, before falling 0.8% at 1 p.m.

Chopra said in a statement that some buy-now, pay-later firms “may welcome CFPB scrutiny in order to identify potentially problematic business practices before they cause widespread harm.” He said the agency “invites these companies to identify themselves to us if they wish to be considered. We are looking into our relevant authorities to conduct examinations on a mandatory basis as well.”

The regulator also plans to set rules to ensure that providers comply with the protections Congress has already put in place for credit cards. And agency officials will suggest options for young people to send their data to credit reporting agencies.

“Today represents a big step forward for consumers and honest finance, and we are encouraged by the CFPB’s conclusions following their review,” Affirm said in an emailed statement. “We will continue to work 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 for not being subject to the same regulatory oversight that typically applies to lenders. The Truth in Lending Act — the landmark law requiring extensive disclosures about unsecured consumer loans — applies only to those loans that require five or more payments, meaning it typically doesn’t apply to buy-now, pay-late offers that are limited in four payments.

“We are also aware that when products are intentionally or unintentionally structured to avoid existing laws, this creates an uneven playing field,” Chopra said. “We want competition to be based on product quality, customer service and pricing, not regulatory arbitrage.”

By Matt Turner, Jenny Surane

Learn more:

A better approach to “Buy Now, Pay Later”

Concerns are growing that the boom in short-term financing that has fueled clothing sales is burdening a growing number of vulnerable shoppers with debt they can’t pay. However, the concept can benefit brands, lenders and consumers, with a few key changes.

Leave a Comment