At the end of last week, the CFPB sent orders to five companies that offer buy-now-pay-later (BNPL) products directing them to provide information to the Bureau. The orders were issued as market monitoring orders under the Dodd-Frank Act, which directs the Bureau to monitor for risks to consumers in the offering or provision of consumer financial products or services and authorizes the Bureau to require covered persons and service providers to provide information needed to perform such monitoring.
The orders were sent just one day after six Democratic Senators sent a letter to Director Chopra expressing concern about potential consumer harm caused by BNPL products and urging him to “review BNPL products as soon as practicable and take action under the CFPB’s existing authorities to protect consumers.” Last month, the House Financial Services Committee held a hearing on BNPL and the Federal Reserve Bank of Kansas City issued a research briefing titled “The Appeal and Proliferation of Buy Now, Pay Later: Consumer and Merchant Perspectives.” The Bureau first flagged its growing interest in BNPL by publishing a blog post in July 2021 to warn consumers of the risks of BNPL products.
In its press release announcing the issuance of the orders, the Bureau identified the following three specific areas of concern:
- Accumulating debt. Contrasting BNPL with “old-style layaway installment loans [that] were typically used for the occasional big purchase,” the Bureau is concerned that because of the ease in obtaining BNPL products, “people can quickly become regular users of BNPL for everyday discretionary buying” and “consumers can end up spending more than anticipated.”
- “Regulatory arbitrage.” The Bureau is concerned that some BNPL providers may be structuring their products in such a way that they may not be subject to certain consumer protections, such as dispute resolution procedures that apply to credit cards.
- Data harvesting. The Bureau is concerned that “[a]s competitive forces pressure the merchant discount, lenders will need to find other sources of revenue to maintain growth and profitability.” As a result, it wants “to better understand practices around data collection, behavioral targeting, data monetization and the risks they may create for consumers.”
The orders seek information about “BNPL transactions, loans, or products, also known as “split-pay” transactions” which they define as:
transactions for personal, family, or household purposes, payable in four or fewer installments, not including a down payment, and contracted to be paid on a debit or credit card payment network. This definition includes transactions that are processed directly on the consumer’s debit or credit card and those that are processed indirectly via a virtual card.
The orders require responses by March 1, 2022 and request detailed information about the following topics (generally for calendar years 2019, 2020, and 2021):
- Business models/metrics such as total transactions, number of consumers engaging in BNPL transactions, number of installments on transactions, number of transactions engaged in by consumers and transaction amounts, transaction volume, number of payments made via different methods used by consumers, number of failed or declined payments, underwriting practices, late fees/account activation fees/other fees charged to consumers, interest, merchant fees, vetting of merchants, and use of virtual cards.
- Loan performance metrics such as use of third party servicers, credit reporting practices, returns and refunds, delinquencies/charge-offs/payment extensions, and collection practices.
- Consumer protections such as disclosures and state licenses.
- User contacts and demographics such as the number of consumers engaging in BNPL transactions who contact the provider about various topics, the number of BNPL consumers using various methods to contact the provider, policies and procedures for handling consumer contacts, and BNPL consumer demographics (e.g. age, gender, income).
- Data harvesting practices such as the types of data collected and retained as a result of a consumer’s use of BNPL and types of data generated from BNPL use data such as by combining such data with externally-sourced data or with other data obtained from the provider’s operations or with data from both sources.
- Data monetization practices such as how BNPL use data or data generated from BNPL data is used in connection with developing, selling, or marketing BNPL products or other products or services, third-party data sharing and related revenues, and use of BNPL use data or data generated from BNPL use data to sell advertising or targeted offers.
Ballard Spahr held a webinar in August 2021, “Buy-Now-Pay-Later Credit: What You Need to Know.”