Harvard fellow: CFPB’s ‘buy now, pay later’ regulation isn’t enough — nothing ‘substantively changes’

Personal finance

Last month, the Consumer Financial Protection Bureau declared that buy now, pay later customers should have the same federal protections as users of credit cards.

However, Marshall Lux, a fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School who studies BNPL, says the government’s latest guidance is already a few steps behind.

“What substantively changes? Nothing really,” he said.

The new regulation means the industry — currently dominated by fintech firms like Affirm, Klarna and PayPal — must make refunds for returned products or canceled services, investigate merchant disputes and pause payments during those probes, as well as providing bills with fee disclosures.

In fact, major buy now, pay later providers already provide such safeguards for users.

“We’ve got an industry that’s moving at light speed and a regulatory process that takes time,” Lux said.

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The Financial Technology Association, an industry trade group representing companies such as Afterpay, Klarna, PayPal and Zip, said it welcomes the guidance for the rest of the industry.

“FTA member companies are committed to strong consumer protections, including for disputes and refunds, and agree these protections should be applied consistently across the industry and to those companies claiming to offer buy now, pay later-like services,” said Penny Lee, FTA’s president and CEO.

Sebastian Siemiatkowski, CEO and co-founder of Klarna, said he has called for this type of regulation for years.

“We support the CFPB’s guidance to protect consumers from harmful players, and Klarna already investigates consumer disputes, covers related refunds and provides purchase information in the Klarna app,” he told CNBC.

‘This is a looming debt problem’

Lux said a key gap in the CFPB’s efforts is regulating how BNPL lenders provide data to the three major credit bureaus: Equifax, Experian and TransUnion.

Up until now, installment payments have largely gone undetected in debt tallies, primarily because most lenders don’t report their customers’ loan information and payment history.

“If I were going to do one thing, it would be this,” Lux said of regulating how a consumer’s BNPL history could factor into their credit history and ultimately their credit score.

“This is a looming debt problem, which we don’t have our hands on yet,” Lux said.

This is a looming debt problem, which we don’t have our hands on yet.
Marshall Lux
fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School

A spokesperson for the CFPB told CNBC the agency has “been monitoring this issue closely and we’re starting to see some progress.”

“But we continue to share concerns that mortgage, auto, and even other BNPL lenders cannot get a full picture of a potential borrower’s debt burden when BNPL is not reported,” the spokesperson said. “So we will continue to surface options on how the industry and consumer reporting companies can develop appropriate and accurate BNPL credit reporting practices.”

For now, BNPL operates “in de facto stealth mode,” Tim Quinlan, senior economist at Wells Fargo, recently told CNBC.

“Because no central repository exists for monitoring it, growth of this ‘phantom debt’ could imply total household debt levels are actually higher than traditional measures,” Quinlan said.

BNPL ‘can easily push consumers further into debt’

Buy now, pay later, which typically splits a purchase into a few interest-free payments, is one of the fastest-growing categories in consumer finance, according to a report by Wells Fargo.

Now, short-term financing plans are one of the most-used forms of credit — second only to credit cards — among consumers, according to a separate report by NerdWallet.

But as BNPL has become more popular, users have become more prone to overspending and missed or late payments, other studies show.

“With rising inflation and the ongoing debt crisis, now more than ever, it’s important that consumers are thoughtful with their purchases and payment methods,” said Michael Hershfield, founder and CEO of Accrue Savings.

“Platforms like BNPL have grown in popularity, even for everyday essentials, but can easily push consumers further into debt,” he said.

‘This is just the beginning’

“This is just the beginning of the CFPB’s regulation of the BNPL industry,” according to Erin Bryan, co-chair of international law firm Dorsey & Whitney’s consumer financial services group.

“This is the most significant regulatory response to BNPL to date,” she said.

For now, much of what consumers like about BNPL products is that they are different from traditional credit cards — “they typically don’t affect a user’s credit rating, the repayment terms are short, and they are available with the click of a button,” Bryan said. 

“The key question is whether the CFPB’s regulation of BNPL providers will ultimately make their products less appealing to consumers,” she added. 

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