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The Consumer Financial Protection Bureau (CFPB) said it plans to start regulating buy-now-pay-later (BNPL) companies amid concerns that fast-growing financial products are hurting consumers.

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The CFPB, which does not currently control BNPL providers, plans to issue guidance or regulations that will bring the sector into line with the standards already set by Congress for credit cards. agency said in a statement released in September. As part of this review, the agency will also ensure that BNPL lenders, as well as credit card companies, are subject to appropriate regulatory reviews.

As interest in a financial product grows, there are calls for more rules. Last December, CFPB Director Rohit Chopra requested information on industry practices and risks from Affirm, Afterpay, Klarna, PayPal and Zip, which are BNPL firms. The last report is the culmination of the findings related to this request for information.

Buy Now, Pay Later is a rapidly growing form of credit that serves as a close replacement for credit cards. This is stated in a statement by Chopra.. “We will work to ensure that borrowers have similar protection whether they use a credit card or a Buy Now, Pay Later loan.

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CFPB report identifies areas of potential harm to consumers

The CFPB report mentions several areas in the BNPL space that are classified as “potential consumer risks”. One such key area was consumer privacy and data protection.

The CFPB stated that the collection of data and the monetization of that data put consumers’ “privacy, security and autonomy” at risk.

Chopra also said the agency is concerned that as major tech players enter the market, it could consolidate market power, thereby reducing long-term innovation, choice and price competition in the industry. It also gives these larger players access to a huge amount of consumer data.

“In the United States, we used to have a separation between banking and commerce” Chopra said. “But as Big Tech-style business practices are being adopted in payments and financial services, this separation is coming out the door.”

Chopra also raised the flag on these issues after Apple announced its BNPL product, Apple Pay Later, earlier this year.

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BNPL borrowers may struggle to repay debt, CFPB says

BNPL suppliers are partnering with retailers to allow shoppers to split the cost of their online purchases into multiple installments at checkout. Part of the appeal is that installment payments, which usually start within a few weeks of purchase, are interest-free. However, missed payments can result in late payments and other penalties.

BNPL firms generally do not report to credit bureaus, making them relatively accessible to consumers. The CFPB is concerned that the ease of access to this financial product could put consumers at risk of quickly becoming overstretched and could sink further into debt.

According to the CFPB, the consumer approval rate for BNPL financing rose to 73% in 2021, up from 69% in 2020, and consumers were increasingly looking for a financing option to pay for common expenses such as groceries and utilities.

But the agency said loan figures show that BNPL borrowers may be struggling to meet their debt obligations. More than 10% of borrowers were charged at least one late payment fee in 2021, compared to 7.9% in 2020. And the industry’s write-off rate, or bad loan rate, jumped to 2.39% in 2021 from 1.83% in 2021. 2020.

Bob Bilbrook, CEO of Captjur, said tighter regulation in the industry is unlikely to dampen appetite for BNPL programs as demand is strong, especially among millennials born between 1981 and 1996 and Generation Z consumers.

“The terrible downside to this, in my opinion, is that during a recession, the deferred debt that these programs will cause in a consumption-based economy could have devastating consequences down the road,” Bilbrook said. “BNPL could become a financial weapon of mass destruction that would effectively disrupt the consumer lending vertical, and companies that choose to support these programs could be hit hard.”

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