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

Consumers are spending more as pandemic restrictions ease.
Buy-now, pay-later is facing toughening rules. (Shutterstock)

The US Consumer Financial Protection Bureau released a sweeping report warning that the burgeoning “buy now, pay later” industry needs fresh regulation to address industry practices.

CFPB Director Rohit Chopra said he’s ordered staff to identify surveillance policies in the industry that need to be curtailed, including the collection of consumers’ purchase and demographic data for targeted ads. Buy-now, pay-later providers will also have to undergo supervisory examinations similar to those applied to credit-card companies.

“It might involve some new rules, some new guidance — and more to come 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 up with a range of options to make sure there is fair competition between buy-now, pay-later firms and the credit-card companies. “We want to make sure to take steps to prevent harm before it spreads.”

The proposals would mark the most extensive regulations yet to hit the sector, 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. fluctuated between gains and losses in New York as some analysts said investors had been expecting more intense criticism.

“The report is less harmful than feared,” Dan Dolev, an analyst at Mizuho Securities, said in a note. While regulators “clearly identified important risks, they are also praising BNPL, which is a positive sign.” Mizuho recommended buying Affirm shares on weakness, and shares of the company rose as much as 3.3 percent earlier Thursday, before slipping 0.8 percent at 1 p.m.

Chopra said in a statement that some buy-now, pay-later firms “may welcome CFPB examination in order to identify potentially problematic business practices before they create widespread harm.” He said the agency is “inviting these firms to self-identify to us if they wish to be examined. We are reviewing our appropriate authorities to conduct examinations on a compulsory basis, as well.”

The regulator also plans to identify rules to ensure providers adhere to protections Congress has already laid out for credit cards. And the agency’s staffers will propose options for the upstarts 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 engage 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 because they haven’t been subjected to the same regulatory oversight that normally applies to lenders. The Truth in Lending Act — the landmark law that requires extensive disclosures for unsecured consumer loans — only applies to those loans that require five or more payments, meaning it doesn’t usually apply to buy-now, pay-later offerings that are limited to four payments.

“We are also mindful that when products are intentionally or unintentionally structured to evade existing laws, that creates an unlevel 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 fuelled apparel sales is saddling a growing number of vulnerable shoppers with debt they can’t pay. But the concept can still benefit brands, lenders and consumers, with a few key changes.

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Enjoy 25% BoF Professional membership until December 20