The nation's consumer watchdog plans to start regulating the booming "buy now, pay later" industry, voicing concerns about potential abuses, data mining and consumers being enticed to overextend themselves.
The Consumer Financial Protection Bureau expects to issue guidance or a rule to set industry standards similar to those that now govern credit card companies.
The plans were announced at the same time the bureau released a report earlier this month highlighting industry trends and the bureau's concerns.
"Buy now, pay later" programs took off online during the COVID-19 pandemic when more consumers were pushed into buying goods and services virtually. They offer consumers short-term loans ranging from about $50 to $1,000 to buy something and pay it off in four interest-free installments over about six weeks.
Some of the big players in the industry include Affirm, Afterpay, Klarna, Paypal and Zip. Those five companies originated 180 million loans worth some $24 billion in 2021, almost 10 times the amount they did in 2019, according to the CFPB.
The companies make money by charging participating retailers and sellers a commission — typically 4% to 6% of the transaction. Retailers absorb the fee as a cost of getting people to buy things that they otherwise wouldn't.
Most "buy now, pay later" lenders also charge borrowers late fees if they miss a payment.
When asked to comment on the report, a spokesperson for Affirm said the company provides "a safe, honest and responsible way to pay over time with no late or hidden fees." Although Affirm doesn't charge late fees, it warns that late payments could harm borrowers' credit scores.
CFPB Director Rohit Chopra said the industry doesn't offer the same clear set of dispute procedures required of credit card companies, "which is creating chaos for some consumers when they return their merchandise or encounter other difficulties."
The bureau also voiced concerns related to data harvesting used to profile shoppers' habits and encourage consumers to buy more and borrow more.
"Borrowers can easily end up taking out several loans within a short time frame at multiple lenders or 'buy now, pay later' debts may have effects on other debts," the CFPB said.
Because most "buy now, pay later" lenders do not submit data to the major credit reporting companies, "both 'buy now, pay later' and other lenders are unaware of the borrower's current liabilities when making a decision to originate new loans," the bureau said.
The Financial Technology Association, which represents many of the "buy now, pay later" lenders, noted that according to the CFPB's report, the industry "imposes significantly lower direct financial costs on consumers than legacy credit products."
"Consumers are choosing buy now, pay later as a competitive alternative to high-interest credit products that trap them in cycles of debt," association CEO Penny Lee said. "We look forward to continuing working with regulators like the CFPB to advance positive consumer outcomes."
