Buy Now Pay Later Regulation to Be Implemented by CFPB

• During the pandemic, the buy now, pay later program was a way many Americans could pay for essentials without spending all of their money.
• Despite its popularity, there are a couple of flaws within the program which the Consumer Financial Protection Bureau (CFPB) plans to improve in the near future. 
• Two plans of action the CFPB wishes to pursue are to implement data surveillance for these corporations and treat them similarly to credit card companies.

During the COVID-19 pandemic, many people were laid off from their jobs causing their expenses to become unaffordable. Many people were unable to purchase some necessities and desired products outright, which caused them to turn to the buy now, pay later (BNPL) program. 

However, despite its advantages, the Consumer Financial Protection Bureau (CFPB) has decided to implement regulations against buy now, pay later companies offering these services, such as Afterpay, Klarna, and Affirm, as they may pose a threat to the current financial market. 

How the BNPL Program Works

When a customer wishes to purchase a product, but they do not have enough money for the whole amount, they can turn to the BNPL program to help them fund the full amount. The BNPL acts as a loan, meaning that users of the program will put a down payment, typically 25% of the final purchase price, and the outstanding amount will be financed to be paid back later. 

Every time a retailer chooses to use the program, a percentage of the transaction fee will be given to the respective BNPL company. 

These outstanding payments will be collected by the BNPL companies, interest-free, at regular intervals. However, the repayment process differs from regular credit card companies. Regular credit card companies will charge significant interest rates on the outstanding amount, making it harder for the credit card holder to pay off their outstanding debt, whereas the alternative makes repayment more affordable. 

Advantages of BNPL

The main advantage of the BNPL program is that it allows consumers to have the opportunity to purchase something they need now, but pay it off in installments at a later date. In addition, providing repayment plans which last between a couple of months and a few years gives the consumer flexibility to find an adequate time period that allows them to pay back their debt. 

Disadvantages of BNPL

The main disadvantage of the buy now, pay later option is the risk of consumer misusing it. When the consumer is given the opportunity to pay later for something they want now, it may increase their chances of purchasing items impulsively. As a result, those with poor financial discipline could have difficulty keeping track of their transactions, which may lead to them making unwise decisions and paying financial consequences.

Recommended Read: How to Stop Impulsing Buying

Issue of the BNPL Program

Although the BNPL loans are interest-free and make it easier for the consumer to pay off their balances in the short term, there are certain problems with the BNPL credit offered, which has raised some red flags at the CFPB. 

The CFPB’s main focus is to ensure the financial markets are regulated and that there are no unfair practices for the consumers. However, for the BNPL program, the sector has caught the attention of CFPB director Rohit Chopra since these companies do not provide any information regarding outstanding loans to the consumers' credit reporting agencies. 

Consequently, since these companies are not giving vital information regarding an applicant’s outstanding loans, these agencies do not have the full picture and cannot accurately determine a person’s credit score.

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Recommended Read: Tips on How To Improve Your Credit Score 

When a person does not have the correct credit score, their credit report could be misleading to a financial institution. As a result, the incorrect information can prevent the financial institution from providing funding to the correct applicant. Instead, they would be increasing their risk as they are unaware of any outstanding loans an applicant may have through the BNPL program. 

What the CFPB Plans to do About the BNPL

The CFPB was put in place after the 2008 housing market crash, which caused the United States economy to experience one of its worst recessions in the nation’s history. Consequently, as the CFPB's main goal is to promote honest financial practices, they are discussing the possibility of implementing data surveillance within the BNPL companies. The data surveillance would ensure that the correct data would be provided to credit reporting agencies so all information they have in their database is up to date and accurate.  

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Furthermore, CFPB’s director believes that the following action plan should treat these BNPL companies like credit card institutions with similar standards. By inputting these practices for BNPL companies, the CFPL believes that it will be the first step in the right direction to ensure BNPL corporations are appropriately regulated and do not harm the financial sector. 

Recommended Read: How to Protect Yourself Against Credit Card Fraud

The Money Wrap-Up

The BNPL was a great implementation that benefited many consumers during the pandemic. Although the new method of paying for essential products helped make the process of paying more accessible for millions of Americans, there are still some drawbacks to the newer alternative of using credit cards. Therefore, the BNPL regulation actions being taken by the CFPL will hopefully prevent the spread of misinformation and reduce the possibility of detrimental consequences within the financial sector.  

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