March 31, 2022
Consumer groups and banks are pushing the Consumer Financial Protection Bureau (CFPB) for better oversight on Buy Now Pay Later (BNPL) services as the terms and conditions for repayment plans are too difficult to understand for many consumers.
While BNPL companies already have instalment loans covered by many federal finance laws, the lack of consistency among communication of late fees and loan repayments pose the risk on consumers’ going into debts they can’t repay.
Since the beginning of the pandemic, BNPL usage soared. All BNPL companies offer different pay later strategies, but the most common in the industry is called pay-in-four. Pay-in-four allows users to pay for their goods or services in four instalments over a six or eight week period.Many of the pay-in-four models that are most commonly used by BNPL companies do not comply with the Truth In Lending Acts jurisdiction. These models tiptoe around the The Truth In Lending Act (TILA) where they need not disclose fees and other loan terms as the law only applies to loans that are paid in more than four instalments.
Klarna and Affirm are voluntarily providing disclosures and marketing messaging that are required by TILA however many BNPL businesses are still inconsistent with messaging.
According to the Bank Policy Institute, the CFPB should be actively policing and preventing deceptive practices. They are suggesting that the CFPB should require BNPL firms to be more transparent and truthful in their marketing materials.
One of the main concerns is that most BNPL companies set up an autopay linked to their customer’s bank accounts. Most of the time, consumers are not able to stop autopay. This is a serious concern if the user bank accounts are running low or have insufficient funds. Consumers are then forced into paying late fees and insufficient funds fees from their own bank on top of late, interest or other fees from the BNPL lender.
In an effort to mitigate this, consumer groups in the US are calling for a larger participant rule for the industry. This rule would allow the CFPB to designate the largest companies in the industry to be consistently supervised for compliance with the law.
The US is not alone, however. The same issue is arising in the UK. According to Rocio Concha, director of policy and advocacy at ‘Which?’, “Our research shows that many users do not realize they are taking on debt or consider the prospect of missing payments”.
According to a recent article by PYMNTs, nearly one in four users miss payments on time and one in three in the age group of 18 to 34.
Finally, in addition to the concern around payment plan terms and conditions, BNPL entices younger people into spending more than they can actually afford.
The good news is, the CFPB has been watching the industry since late last year and we will likely see some guidance and oversight on the industry in the next few months.