US regulators get tough on ‘buy now, pay later’ industry

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

FPB Director Rohit Chopra said he has 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.

The proposals would mark the most extensive regulations to hit the sector, which has exploded in popularity 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, Block and PayPal Holdings fluctuated between gains and losses in New York as some analysts said investors expected greater 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.” 

Mr 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 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,” Mr Chopra said.

“We want competition to be based on product quality, customer service and pricing, not regulatory arbitrage.”

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