Thank you for joining us to discuss the CFPB’s report of findings related to the “Buy Now, Pay Later” product. Last year, the CFPB ordered a number of market players to turn over a range of data and business information. To prepare this report, we conducted a detailed analysis of this confidential information, as well as public submissions and other filings. We also engaged many of our international counterparts to understand their own market reviews.
First, I will explain some of the typical attributes of this product and what it’s being used for. Then, I’ll share some of the regulatory issues we identified in our analysis. Finally, I’ll detail what I’ve directed the CFPB staff to pursue in terms of next steps.
At first glance, Buy Now, Pay Later is a vague marketing term. After all, every type of loan or extension of credit would fit this description. It’s critical that we understand what this product is and what it isn’t. In many ways, Buy Now, Pay Later is a blast from the past, but, importantly, it is supercharged for the era of e-commerce, digital surveillance, and gamification.
In 1950, a new charge card called Diners Club was introduced. Diners Club was one of the first credit cards, where there were two sets of customers: the restaurant and the diner. The restaurant accepting the card would pay a commission to Diners Club on its sales. Restaurants and other merchants liked accepting charge cards because it could encourage diners to spend more. Customers were not charged interest, and would pay off their balance each month. The Diners Club card eventually morphed into the modern day credit card. Buy Now, Pay Later heavily resembles this core concept, with lenders offering the product through participating retailers and sellers and charging a commission that is typically 2 to 4 percent of the transaction amount, which is a significant part of the lenders’ overall revenue.
Buy Now, Pay Later also relies on another longtime method of marketing: buying with “four easy payments.” Decades ago, informercials began to depict audiences wowed by rotisserie roasters, juicers, home fitness equipment, and more by allowing viewers to call a toll-free number and purchase with four easy monthly payments. This has been long, time-tested method for increasing sales. Buy Now, Pay Later allows more retailers to sell using this informercial-style approach.
Put simply, Buy Now, Pay Later can be compared to a credit card that incorporates informercial-style payment plans. While major providers don’t currently rely on charging interest, they make money through fees charged both to sellers and to consumers who don’t pay on time.
But perhaps, more importantly, we find that Buy Now, Pay Later firms are building business models dependent on digital surveillance. In some ways, these firms aren’t just lenders, they are also advertisers and virtual mall operators. Because they are deeply embedded as a payment mechanism for e-commerce, Buy Now, Pay Later lenders can gather extraordinarily detailed information about your purchase behavior, in a way traditional cards cannot. Buy Now, Pay Later has mimicked parts of Big Tech’s surveillance model to harvest and monetize data in ways that banks and credit unions have typically avoided. Many of these firms have created their own gateways and digital, app-driven marketplaces, powered by personalized behavioral data, to lure their users into buying more products financed through a Buy Now, Pay Later loan. Increasingly, Buy Now, Pay Later firms can leverage data and user interface design to gamify shopping and lending, promoting repeat usage and further revenue generation.
As the pandemic fueled a further rise in e-commerce, Buy Now, Pay Later soon became ubiquitous online. At first, apparel and cosmetics retailers were heavily drawn to it, but today, retailers and online sellers across sectors of the economy offering it as a payment option. Buy Now, Pay Later is a close substitute for a credit card, and traditional credit card companies are also deploying similar payment plans for their cardholders.
The CFPB’s report estimates a nearly ten-fold increase in the use of Buy Now, Pay Later loans from just two years prior. While initially thought to be a product catering to younger consumers, we find that adoption is growing across all age groups.
I’d like to turn to regulatory and consumer protection issues. Since taking office, I have directed our staff to identify ways to invite more competition into markets for consumer financial products and services. Buy Now, Pay Later firms are challenging existing players and offering new options to retailers and borrowers.
At the same time, we are also mindful that when products are intentionally or unintentionally structured to evade existing laws, that creates an unlevel playing field. We want competition to be based on product quality, customer service, and pricing, not regulatory arbitrage.
The CFPB’s report identifies several places where firms are not providing the same rights and protections with Buy Now, Pay Later loans that credit card companies provide.
Many Buy Now, Pay Later lenders are not offering the same clear set of dispute protections that credit card issuers have long been required to offer, which is creating chaos for some consumers when they return their merchandise or encounter other difficulties. Many Buy Now, Pay Later lenders do not offer clear and comparable disclosures of the terms of the loan like other lenders.
Congress has enacted laws, including with respect to credit cards and related products, that seek to address these issues of transparency and choice. When it comes to credit cards, the law also requires that lenders ensure that borrowers have the ability to repay their borrowings to avoid overextension, and that penalty fees be reasonable and proportional.
Another major area we identified relates to data surveillance. Buy Now, Pay Later firms 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. While credit card companies are also doing more with our data, Buy Now, Pay Later is at a different level. Through their proprietary interfaces, Buy Now, Pay Later firms can use our data to determine what products we see through paid product placement. This opens up the door to digital dark patterns and even the potential to price products based on our behavior.
In the United States, we have generally had a separation between banking and commerce. But, as Big Tech-style business practices are adopted in the payments and financial services arena, that separation goes out the door.
This heavy reliance on data, combined with a mismatch on transparency and choice, elevates the risk of what the report describes as “overextension.” Specifically, there are two types of overextension risk: loan stacking, which is the risk that a borrower takes on multiple Buy Now, Pay Later loans at the same time; and sustained usage, which is the risk of repetitive borrowing causing stress on borrowers’ ability to meet other, non-Buy Now, Pay Later financial obligations.
We’re already seeing deterioration in credit performance on Buy Now, Pay Later loans. In 2020, 2.9 percent of borrowers in our dataset “charged off” on a Buy Now, Pay Later loan, which jumped to 3.8 percent in 2021. And public filings show that this upwards trend is continuing through the first half of 2022.
Overextension is also a significant issue in the broader credit card market as well, but is compounded by a host of issues we describe in the report. Additionally, consumer reporting companies have been slow to develop mature credit reporting protocols with respect to Buy Now, Pay Later. Mortgage lenders and auto lenders have raised concerns to me that the growth of Buy Now, Pay Later with no associated credit reporting makes it more challenging to know whether a borrower can afford a mortgage or auto loan. The Buy Now, Pay Later firms themselves also may have no idea how many other loans a consumer may have with other Buy Now, Pay Later providers.
Overall, the report prepared by the CFPB staff does not seek to determine whether the rise of the Buy Now, Pay Later market is a positive or negative development. I believe that Buy Now, Pay Later can grow and serve consumers well if we can collectively address some of the gaps I’ve just outlined. If Buy Now, Pay Later lenders incorporate the protections and protocols that we observe in other financial products, this would go a long way to ensure that there is healthy competition where consumers have a baseline level of protections.
After reviewing the report, I’ve asked the CFPB’s staff to pursue a number of additional steps, in addition to ongoing market monitoring, including how the credit card industry writ large is incorporating Buy Now, Pay Later features.
First, I’ve asked our staff to identify potential interpretive guidance or rules to issue with the goal of ensuring that Buy Now, Pay Later firms adhere to many of the baseline protections that Congress has already established for credit cards. This report provides an important roadmap for this effort by identifying a number of risks. Agency staff will also be conducting outreach to investors and new market entrants seeking to enter the marketplace in a compliant manner. We will use their input as part of our broader effort to ensure a level playing field.
Second, I have asked that staff identify the data surveillance practices that Buy Now, Pay Later providers engage in that may need to be curtailed. Specifically, we will be examining some of the types of demographic, transactional, and behavioral data that is collected for uses outside of the lending transaction, including for the purpose of sponsored ad placements, sharing with merchants, and developing user-specific discounting practices. This is also related to our inquiry into Big Tech payment systems, which appear to be integrating Buy Now, Pay Later into their offerings. We will also be coordinating with the Federal Trade Commission, which launched a rulemaking process on commercial surveillance, and, if finalized, these rules will be enforceable by the CFPB in the financial services arena.
Third, CFPB staff will continue to surface options on how the industry and consumer reporting companies can develop appropriate and accurate credit reporting practices. Without this, consumers and lenders across consumer finance will suffer.
Fourth, given their rapid growth, we want to ensure that Buy Now, Pay Later companies are subjected to appropriate supervisory examinations, just as credit card companies are. We understand that some Buy Now, Pay Later firms may welcome CFPB examination in order to identify potentially problematic business practices before they create widespread harm. We are 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. Our staff will also be working with state regulators that license nonbank finance companies on examinations of these firms.
Finally, I’ve asked that we take steps to ensure that the methodology used by the CFPB and the rest of the Federal Reserve System to estimate household debt burden reflects the reality of today’s market. Existing approaches to measure outstanding credit card debt exclude Buy Now, Pay Later loans, and it’s critical that this growing category does not hide in the shadows.
To conclude, I want to recognize the efforts of those who submitted comments, data, and other information as part of this study, as well as the many individuals involved in preparing it. With roughly $900 billion in outstanding credit card debt and Buy Now, Pay Later lending rapidly gaining share, the CFPB will continue to make sure that Buy Now, Pay Later is fair, transparent, and competitive.