December 7, 2022

Buy now, pay later apps like Affirm and Afterpay just come under federal oversight


A The federal consumer watchdog has just launched an investigation into five major companies offering “buy now, pay later” (BNPL) services.

The Consumer Financial Protection Bureau (CFPB) announced Thursday that it is opening an investigation to determine the benefits and risks of loan-type programs, which have become increasingly popular alternatives to payments made by debit or credit cards. .

“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 also gets the debt immediately,” said Rohit Chopra, director of the CFPB, in the ad. “We have directed Affirm, Afterpay, Klarna, PayPal and Zip to submit information so that we can report to the public on industry practices and risks.”

If you’ve shopped online in the past few years, you’ve almost certainly come across one of these companies. They usually show up on an online retailer’s checkout page, where Affirm, Afterpay, or another fintech company prompts you to make a purchase now, even if you don’t have the funds. With installment plans, companies allow you to either pay the entire total at a later date or break your payments into smaller chunks.

The trap ? Late fees and / or interest, depending on the specific payment plan.

Buy now, pay later: costs and risks

The CFPB expresses its concern that consumers are taking on too much debt with BNPL products. The agency also assesses consumer protection laws that apply to nascent fintech products, as well as the impacts of data collection practices used by the BNPL industry.

Consumer advocates have long warned of the financial dangers these companies can pose to buyers, and now the government is stepping in.

The CFPB investigation comes after a hearing held by the US House Committee on Financial Services early last month. The FinTech Committee Working Group has raised many of the same questions that CFPB is now addressing.

“While companies and developers argue that these products can be beneficial because they offer flexibility and a cheaper alternative to credit cards,” said task force chairman Stephen F. Lynch (D-Mass.), during the hearing, “consumer advocates and research groups raised concerns about the risk that consumers will take on too much and unsustainably debt, noting that most businesses who buy now and pay later do not assess their ability to repay.

The House investigation also included other fintech companies that offer payday cash advances and credit-like products.

“Regardless of their style, products that provide finance or money today and are repaid later are credit,” Associate Director Lauren Saunders of the National Consumer Law Center said at the hearing. “Shiny fintech outfits don’t remove consumers’ need for basic protections. “

Money has contacted the five companies named in the CFPB announcement. Affirm, Afterpay and Zip all say they welcome the agency’s investigation, underscoring their own dedication to the financial well-being of consumers. And PayPal says it is cooperating with CFPB.

“Our clients trust us for our transparency and we take this responsibility very seriously. PayPal is reviewing the letter and we will continue to work productively with CFPB to provide the requested information, ”a PayPal spokesperson said in a statement.

Klarna said she “will continue to work with regulators to educate them on how our products are structured, used and benefit both consumers and retailers.”

Following the CFPB’s announcement, the shares of several BNPL listed companies fell.

More money

The dangers of using trendy online installment programs to buy things you can’t afford

Online retailers now allow you to pay in installments. Proceed with caution

Cash Advance Apps Runs down users with cute mascots and quick payouts – but beware of the high costs

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