Michael Brochstein/Sipa USA via AP Images
Rohit Chopra, director of the Consumer Financial Protection Bureau, speaks at a hearing of the Senate Banking, Housing, and Urban Affairs Committee on April 26, 2022.
Yesterday, the Consumer Financial Protection Bureau (CFPB) published a report on the business practices of leading buy now, pay later (BNPL) companies Affirm, Afterpay, Klarna, PayPal, and Zip. When the CFPB announced the inquiry last year, Director Rohit Chopra described BNPL as “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.”
Earlier this year, I reported on how the expansion of BNPL services threatened legacy financial institutions by imposing higher merchant fees on retailers, thereby reaping greater profits. “Retailers eat the costs,” I wrote, because BNPL users spend 68 percent more relative to non-BNPL users, in addition to shopping 20 percent more often. Consumers in many cases also did not realize that the easy line of credit offered by BNPL lenders was another form of debt, without the protections afforded to traditional lines of credit.
Investors are attracted to BNPL services because of their use among early-adopter Gen Z and millennials. However, the CFPB’s report shows that BNPL adoption has grown across all age groups, except for those older than 51.
Once used for small items such as clothing, BNPL loans are now used for essentials such as groceries, health care payments, gas, and even mutations such as “nanodegrees” through the Affirm-partnered company Udacity, which bills itself as “Learn now, pay later.” The CFPB report states that clothing and beauty merchants, once accounting for 80.1 percent of purchases in 2019, represented only 58.6 percent of purchases in 2021, even as Chopra said the usage of BNPL has increased nearly tenfold in the last two years.
Whatever service you can think of, swap out the “buy” and there is likely a BNPL option available, or soon will be. For example, Afterpay offers its BNPL services for plane tickets through Fly Now, Pay Later, while the smaller BNPL lender Zilch even offers BNPL loans for dining out.
The expansion of the market should come as no surprise. At the CFPB report announcement, Director Chopra put it simply: “Buy now, pay later can be compared to a credit card that incorporates that infomercial-style payment plan.”
That is then supercharged through “building business models really dependent on digital surveillance.” In other words, BNPL companies capitalize on how e-commerce reveals reams of customer data, which previous financial titans like banks, credit unions, and credit card companies did not have access to or typically avoided. Chopra continued: “Increasingly, buy now, pay later firms can leverage data and user interface design to gamify shopping and lending, promoting repeat usage and further revenue.”
While increased shopping is not necessarily a bad thing, on the consumer side, the CFPB report highlights that the rate of late fees has increased alongside the rate of loan approvals, meaning more people are accessing credit they cannot afford. For example, the report points to consumers using credit cards for their BNPL purchases—potentially accruing interest through the former if they don’t pay off their credit card balance—on a supposedly interest-free BNPL loan, nullifying the pitch BNPL companies offer to consumers. It’s “paying for credit with credit,” the report notes. While not a huge piece of the BNPL business model, the report also states that revenue from late fees rose from 4.8 percent in 2020 to 6.9 percent in 2021.
Chopra said BNPL companies are “harvesting and leveraging our data to grow revenue outside of their core lending business in ways that we do not see with other lending products necessarily.”
On the issue of return policies, one consumer told the CFPB that a BNPL lender refused to acknowledge and follow their own dispute policies, instead placing the blame on the consumer for not trying to contact the merchant instead.
These inconsistent consumer protections are exacerbated by what the CFPB calls loan stacking and sustained usage, referring to borrowers who take out several loans at once and are unable to pay them. Others face the risk of being unable to keep up with rent, utilities, mortgages, auto loans, or student loans. In the short term, delinquent borrowers can be kicked off their BNPL service. In the long run, sustained usage has the risk of “continual access to an often-increasing amount of BNPL credit and personalized product discovery engine … unlike loan stacking, which can occur almost instantly, sustained usage may take months or even years to fully appear.”
The CFPB admits that sustained usage is not a risk that’s unique to the BNPL industry. However, BNPL services can amplify those risks. Parallels are thus drawn to personal loans that are also structured as fixed installment payments, and typically smaller than an auto loan or a mortgage, thereby translating into overall lower payment amounts. According to a 2017 study published by one of the nationwide consumer reporting companies, TransUnion, consumers surprisingly prioritized personal loans over auto loan, mortgage, and credit card payments. “Unlike mortgages and auto loans, personal loans are not secured by valuable personal property,” the report states. “And unlike credit cards, which offer access to future credit, personal loans have virtually no future utility.”
So despite having no future value for consumers, because of the gamified nature of BNPL products through its data collection practices, and the fact that BNPL lenders force borrowers onto an automatic payment plan, the long-term risk of sustained usage continues.
BENEATH THE SEAMLESS USER EXPERIENCE, Chopra said BNPL companies are “harvesting and leveraging our data to grow revenue outside of their core lending business in ways that we do not see with other lending products necessarily.” The result is that, unlike credit card companies that can simply offer a line of credit or reward programs, BNPL companies through their proprietary interfaces “can use our data to determine what products we see through paid product placement … this opens up the door to a host of potential issues like digital dark patterns and even personalized pricing.”
When asked to elaborate further on personalized pricing, a CFPB official said, “The concern that we have with data in general is that once a company has [a consumer’s demographic, transactional, and behavioral] data, there is no knowing exactly where the line will be drawn and what they could do with it in the name of revenue generation.” The CFPB official cautioned, “We can’t confirm that any specific lender is engaging in any specific practice of that right now.”
Still, that wouldn’t be too far-fetched to imagine. For example, as I reported earlier this year, 53 percent of low-income consumers cited affordability as a reason for using BNPL, and along racial lines, 51 percent of Black consumers cited affordability versus 36 percent of white consumers.
And while the report does not specifically cite “personalized pricing,” it does include a section on enhanced user experiences, propelled by “dark patterns.” This refers to what tech executives call “data-driven UX changes” informed by user engagement, that simply steer users in a particular direction favorable to the company. For a concrete example, Vox reported how Instagram asked if they could use consumers’ app and website activity to provide better personalized ads. Meanwhile, opting out confusingly required users to tap a dark button over the bright blue one.
A new Federal Trade Commission (FTC) staff report on digital dark patterns published on the same day as the CFPB’s report echoes Chopra’s concerns. The FTC report states, “dark patterns may have a differential impact on lower-income consumers or other vulnerable populations who are more likely to rely on a mobile device as their sole or primary access to the internet.” The report continues by pointing to a Pew Research Center study that detailed how a quarter of Hispanic households and 17 percent of Black households were smartphone dependent for internet access, compared to only 12 percent of white households.
The self-reported data to the CFPB from the leading BNPL companies only goes until the end of 2021, meaning that while the report provides a blueprint for future regulatory action, the BNPL market’s maturation is far from over, leaving consumers to bear the risk until then.
