The CFPB Ramps Up Oversight of Buy Now, Pay Later Companies

BNPL in the CFPB’s Crosshairs

The Consumer Financial Protection Bureau is ratcheting up its oversight of buy now, pay later fintechs. The CFPB is seeking more information about the fees these companies charge for late and missed payments. That has worried investors, sending shares of AfterPay (AFTPY) and Affirm (AFRM) lower. But some feel that these investors may be overreacting.

Unlike banks, BNPL companies don’t need fees to survive. They make most of their money from the merchants who pay to offer BNPL services to consumers. Merchants are willing to pay some of the costs associated with credit in hopes that consumers will buy higher-priced items.

CFPB Raises Concerns About Data Harvesting

The CFPB is seeking information from Affirm, AfterPay, and other BNPL companies about their late-fee policies and how they inform consumers of their payment schedules. The CFPB wants to ensure consumers know exactly what they are getting into when they use these payment options.

The CFPB also has questions about data mining at these fintechs. These companies are in growth mode as installment payments online take off, but will eventually need additional revenue streams. The CFPB is worried BNPL companies could diversify by selling data to merchants. As a result, the CFPB is seeking answers to questions around data harvesting from payment histories.

BNPL Market Taking Off

BNPL is becoming a part of daily life for millions of online shoppers — so much so that Equifax (EFX) will begin recording installment plans on credit reports next year. The aim is to give lenders a clearer picture of a borrower’s outstanding debt. BNPL is also becoming part of major companies’ operations, including PayPal (PYPL) and Block (SQ), which is buying Affirm in a $29 billion deal.

BNPL took off during the pandemic as consumers stuck at home shopped online in record numbers. Now, this payment method is becoming ubiquitous for millions of people. While the CFPB inquiry raises red flags for some investors, there’s likely a lot of growth left for the industry.

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