Federal Watchdog Probes Buy Now, Pay Later Programs

The CFPB is asking Affirm, Klarna, Afterpay and others about their practices

Man shopping for shirts in clothing store

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Federal regulators want to find out whether the companies behind increasingly popular buy now, pay later programs are treating their customers fairly. 

The Consumer Financial Protection Bureau on Thursday sent orders requesting information to buy now, pay later (BNPL) services Affirm, Afterpay, Klarna, PayPal, and Zip. The bureau is attempting to determine whether customers using BNPL are building up excessive debt, whether the companies are skirting consumer protection laws that apply to financial products, and what companies are doing with the financial information they collect from customers.

“Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too,” Rohit Chopra, director of the bureau, said in a statement. He said information collected from the five companies will be used to report to the public about industry practices and risks. 

Buy now, pay later programs have become widely used alternatives to credit cards for customers who may not have the cash to pay upfront for expensive retail items. Like traditional layaway programs, customers typically make a down payment—about 25% in many cases—but, unlike layaways, the customer can take their purchase home that day, whether it be a pair of pants or a Peloton exercise bike. And while some repayment plans may be interest-free, unlike credit cards, failing to make a payment on time may incur a penalty—and recent studies show that many customers do in fact stumble when it comes to the “pay later” part.

Joseph Lynyak, a lawyer with Dorsey & Whitney and an expert on regulation who represents financial companies, said the bureau’s announcement was overreaching by implying something was wrong with the way BNPL companies do business, since it hadn’t offered any concrete evidence of that. However, he said, the bureau does have the authority to ask the questions due to its broad investigatory powers.

“They can target you and ask for your underwear as well as the underwear you wore two weeks ago,” he said. “Could they do it in a less accusatory manner? I would say yes, that would probably be a good idea.” 

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  1. Consumer Financial Protection Bureau. “Consumer Financial Protection Bureau Opens Inquiry Into “Buy Now, Pay Later” Credit.”

  2. Federal Reserve Bank of Kansas City. “The Appeal and Proliferation of Buy Now, Pay Later: Consumer and Merchant Perspectives.” Accessed Dec. 16, 2021.

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