The Consumer Financial Protection Bureau is considering ways to bring credit card consumer protections to users of buy now, pay later products.

Buy-now-pay-later (BNPL) products – which are typically installment loans that allow customers to split a purchase into four equal payments – may be a cheaper and easier option for consumers compared to other credit products, the CFPB said in a much-anticipated report released Thursday. But some issues related to disclosures, dispute resolution and the “piling up” of debts within the BNPL need more monitoring, he said.

The CFPB said it was looking to identify “advisory opinions” or regulations that would bring more credit card-like protections to the BNPL market.

“We will work to ensure that borrowers have similar protections whether they use a credit card or a Buy Now, Pay Later loan,” CFPB Director Rohit Chopra said in a statement.

But overall, buy now, pay later “imposes significantly lower direct financial costs on consumers than traditional credit products,” the report says.

“The nature of the product structure and underwriting strategy” can minimize “overspending and leverage cycles,” the CFPB added.

While the CFPB called for some changes in the BNPL industry, the tone was generally positive, said Scott Talbott, vice president of government affairs at the Electronic Transactions Association, which includes several BNPL companies as members.

“CFPB’s BNPL report confirms that BNPL, free of charge and interest, significantly helps consumers,” he said.

Increase in popularity

The CFPB has been closely scrutinizing BNPL products since December, when the agency issued a market watch request to BNPL’s five largest suppliers: Affirm Holdings Inc.; Afterpay, now owned by Block Inc.; Klarna; PayPal Holdings Inc. and Zip.

BNPL products have seen a spike in popularity since 2020, especially after the coronavirus pandemic.

The total number of BNPL loans issued each year in the United States increased by 970%, from just under 17 million in 2019 to 180 million in 2021, the CFPB found. Total dollar lending volume jumped more than 1,000% during that period, from $2 billion in 2019 to $24.2 billion in 2021, the CFPB said.

Most purchases ranged from $50 to $1,000, and 89% of consumers using BNPL link their accounts to debit cards.

The most popular BNPL option in the United States is known as a quarter-pay, where consumers can split payments for an item into four equal installments paid over six weeks. BNPL’s businesses run soft credit and fraud checks on customers and do not charge interest if payments are made on time, the CFPB found.

BNPL companies approved 73% of loan applicants in 2021, compared to 69% in 2020.

Late fee policies vary by issuer. And the number of unique users rose to 10.5% in 2021 from 7.8% in 2020, the CFPB said.

Protective measures

Consumer advocates have raised concerns about the lack of protections for BNPL users. They fear that disclosures are inadequate and that resolving disputes may be difficult. Consumers can get caught in a “loan stack” when they have multiple outstanding loans from different BNPL providers, leading to potential debt traps, they say.

Consumer credit reporting agencies like Equifax, Experian, and TransUnion have only recently begun to find ways to report BNPL loans. And there are concerns that consumers won’t get credit for on-time payments on their credit reports.

BNPL providers report missed payments to credit reporting companies, which can lower their credit scores. But the BNPL industry and credit bureaus have developed ways to ensure consumers can get credit for on-time payments.

The CFPB echoed many of these concerns in its report.

The disclosures of several BNPL suppliers are consistent with those required by the Truth in Lending Act. But the law itself only applies to companies that offer loans repaid in more than four instalments. The CFPB said this has led to a lack of standardized cost of credit disclosures.

The report also notes that BNPL companies require consumers to try to return unwanted or damaged purchases and obtain refunds directly through merchants. This creates confusion for customers and reduces dispute resolution rights, the office said.

The office also noted that most BNPL providers require customers to authorize automatic payment of outstanding loans through their debit or credit cards, limiting consumer choice and potentially leading to overdrafts and other bank charges if accounts are overdrawn.

Some companies also charge multiple late fees on the same missed payment, although this is not uniform practice, the CFPB found.

The CFPB has also raised concerns about how BNPL companies use consumer data for advertising and other purposes, including the monetization of such data.

The CFPB may find it difficult to impose changes on the industry. The four-way payment product is not governed by either the Truth in Lending Act or Regulation Z, which governs credit cards and may provide stricter dispute resolution requirements.

To address loan stacking, BNPL firms should have a single database of outstanding loans issued in real time, the CFPB said. Such a database does not currently exist.

The CFPB is “reviewing our authorities” to require BNPL companies to submit to reviews by CFPB examiners, Chopra said in a conference call Wednesday.

Some BNPL companies have already said they welcome direct oversight from the office, he added.