In a blog post published earlier this month, the CFPB warns consumers of the risks of buy-now-pay-later (BNPL) credit. The blog post was likely triggered by the spike in the use of BNPL during the COVID-19 pandemic referenced in the blog post.
In explaining how BNPL works, the CFPB indicates that when making a purchase using BNPL, the consumer selects that option at time he or she checks out online or in an app. If approved (usually within minutes), the consumer is sent the purchased items and a payment schedule is established, typically four fixed payments made bi-weekly or monthly until the balance is paid in full. Most BNPL companies do not charge interest or finance charges.
In addition to cautioning consumers not to overextend their finances, the CFPB advises consumers that while most BNPL companies do not currently report to consumer reporting agencies, some do report. As a result, a late payment owed to a BNPL company that does report to consumer reporting agencies can harm a consumer’s credit history. The CFPB advises consumers to research whether or not a BNPL company reports to credit bureaus before using its service.
The CFPB also warns consumers that:
- While many BNPL companies do not charge interest, most companies do charge late fees.
- Consumers could be blocked from future purchases until past due payments are made.
- Unpaid debts could be sent to a debt collector for collection.
- A consumer’s bank could charge an overdraft or NSF fee if the consumer enrolls in automatic repayment of BNPL credit through a debit card or bank account and does not have enough funds to cover a payment.
- BNPL credit currently lacks the consumer protections that apply to credit cards such as dispute protections for faulty purchases or scams.
The CFPB advises consumers to carefully review BNPL terms and conditions and to compare BNPL to other payment options.
The CFPB’s recent scrutiny of the BNPL industry strikes us as rather curious given that the majority of the BNPL industry offers credit products free of cost. It is even more confounding in light of the CFPB’s apparent blessing of other short-term loan products with substantially higher costs to consumers (e.g., its exclusion of NCUA “payday alternative loans” from the CFPB’s payday loan rule). It is difficult to imagine a credit product that is more consumer friendly than one that comes with no cost to the consumer while allowing the consumer greater flexibility in making purchases. Instead of focusing on these so-called “risks,” the CFPB’s efforts might be better spent exploring and encouraging the ways that BNPL companies and other FinTech lenders can continue to innovate with lower-cost, consumer-friendly products.