A report released by the Consumer Financial Protection Bureau analyzed the Buy Now, pay later industry during the pandemic. It found that the industry grew rapidly, but borrowers may not receive the same protections and disclosures. The report noted that the five firms surveyed experienced a significant increase in loans in 2021.
A Buy Now, Pay Later loan is a type of loan that is commonly used to replace credit cards. It is important that borrowers have the same protections as those who use credit cards.
A Buy Now, Pay Later is a type of credit that allows consumers to purchase a product and then pay it off over multiple installments. Usually, the first payment is a down payment, and these loans range from $50 to $1,000. Late fees are also typically charged if the borrower fails to make the payments.
The rise of Buy Now, Pay Later credit over the past decade has been attributed to the increasing popularity of this type of loan among consumers who are looking to avoid credit card fees and manage their purchases over time.
The traditional Buy Now, Pay Later product was mainly focused on the beauty and apparel industry. However, in 2021, the company started branching out and offered loans to other industries such as pet care and groceries. In 2019, the beauty and apparel merchants only contributed 80.1% of the total loans originated.
The number of people getting approved for credit by the company has also increased. In 2021, 73% of the applicants were approved for credit, up from 69% in 2020.
The number of people who were charged with at least one late fee has also increased. In 2021, 10.5% of the company's unique users were charged with at least one late fee.
The number of purchases ending in returns also increased in 2021. 13.7% of the loans in 2021 had at least some of the products that were returned, up from 12.2% in 2020.
The profitability of the lenders also decreased in 2021. In 2021, the margins were at 1 percent of the total loan volume, which is lower than the 1.27% they had in 2020.
Despite the positive effects of the product's marketing, the report noted that there are risks associated with using Buy Now, Pay Later loans. These include high interest rates and late fees.
Some of the products that are commonly used by Buy Now, Pay Later borrowers do not provide the same level of protection as other financial services. For instance, they do not have standardized cost-of- credit disclosures and require consumers to opt-in to automatic payments.
Due to the increasing popularity of the product, many Buy Now, Pay Later lenders are now shifting their operations to a more digital-based model. This new approach allows them to collect and use consumer data to improve their products and services. However, this practice could threaten the privacy and security of their customers.
Due to the lack of credit reporting data, many Buy Now, Pay Later, and other lenders are not able to identify the current liabilities of their customers. This means that they are not able to provide their customers with the necessary information to make informed decisions when they apply for credit.
The product's design encourages consumers to borrow and purchase more, which could result in debt accumulation. This could also affect other debts. Due to the high interest rate and late fees associated with these loans, borrowers might end up taking out multiple loans in a short time.
Aside from the federal government, Buy Now, Pay Later, and other financial services companies are also subject to state and federal oversight. The Consumer Financial Protection Bureau (CFPB) has the power to supervise these types of companies.
In some states, Buy Now, Pay Later is considered a consumer credit product. It requires the company to register and license its products in order to comply with the state's consumer credit laws. On the other hand, other states do not require the licensing or registration of Buy Now, Pay Later products.
To address the various discrete consumer harms associated with the products, the agency will develop interpretive rules or guidance that will help ensure that Buy Now, Pay Later, and other financial services companies follow the same consumer protections as credit card companies. In addition, the agency will also conduct regular supervisory examinations to ensure that these types of companies follow the proper procedures.
To address the issue of data harvesting, the bureau will identify the practices that it believes are most likely to violate the privacy and security of its consumers' information.
To minimize the risk of over-extension, the agency will continue to work with the industry to improve the credit reporting practices of financial institutions. It will also take steps to ensure that the methodology used by the Federal Reserve System and other agencies is rigorous.
In January 2022, the agency released a public notice asking the public to provide their feedback on the experiences they had with the products and services of Buy Now, Pay Later.
The data and insights in the report were derived from the feedback that the agency received from its market monitoring operations. In addition, the reports were analyzed by the public database of the bureau and the financial filings made by the five firms that received the agency's orders.