In her recent research on buy now, pay later, Consumer Reports Senior Policy Counsel Jennifer Chien was surprised by the wide variety of installment plan lengths and fees in the rapidly evolving market.
“I came out of the research thinking the market is more complex and muddier than when I went into it,” said Chien, a lawyer by training who is focused on financial fairness for Consumer Reports.
That takeaway, she said during an interview last week, suggests the market warrants more attention from researchers and regulators.
Chien’s white paper, “Buy now, pay later: Policy measures to mitigate consumer risks from evolving business practices,” was published last month by the nonprofit consumer advocacy organization. In it, she offers policy recommendations that seek to better protect BNPL users from becoming overextended by the loans or from having their data harvested.
Although the BNPL market’s exponential growth appears to have slowed, Chien said she’s also concerned about the product becoming more ubiquitous and used for everyday purchases. “That is one of the things that regulators should really look out for, as this market seems to be evolving rapidly and in a divergent manner,” said Chien, who has a law degree from Harvard Law School, according to her Linkedin profile.
Editor’s note: This interview has been edited for clarity and brevity.
PAYMENTS DIVE: What struck you most as you researched BNPL?
JENNIFER CHIEN: Two trends that exacerbate some of the risks to consumers, or introduce new risks: One was this shift to buy now, pay later companies offering longer-term, interest-bearing loans. The research that we did found that four out of eight companies that we evaluated offer longer-term interest-bearing loans, and in some cases, it makes up the vast majority of their portfolio. It's not that this interest-bearing loan itself is the issue. It's more the potential confusion for consumers. Past buy now, pay later marketing was very much focused on the no-fee, no-interest, pay-in-four traditional model. So it raises a concern for us that consumer comprehension may not have caught up to the reality that there are many other products being offered by buy now, pay later companies.
The other major trend that struck me was the shift to an app-based acquisition model. So as opposed to the buy now, pay later service just being integrated into checkout at each different retailer, some of the buy now, pay later companies are shifting to having their own e-commerce-like site, where the consumer goes to that site, shops for products and uses buy now, pay later that way. Again, that in and of itself is not necessarily an issue, but it raises some potential concerns around data-harvesting practices and use of deceptive design to lead consumers to spend more, to purchase more frequently. We see that from the statistics that buy now, pay later companies share, that their services result in some consumers spending more money than they would have.
Our evaluation confirmed that there is quite a lot of data collection in the industry. The contracts and the written documentation these companies provide generally are a little bit ambiguous in saying what they collect and for what purposes. But there are instances that show they collect more information than is necessary for providing the service — so, things like browsing history, geolocation data, sometimes biometric data. In one or two cases, the app could access information on the phone, like photos and contacts, which is highly problematic.
On which BNPL issues do you expect we might see action from regulators in the near term?
Credit reporting has been identified as being inconsistent among buy now, pay later companies. There is positive movement with respect to credit reporting practices in the market. The Consumer Financial Protection Bureau did identify credit reporting as one of the areas that they would work on in buy now, pay later. There needs to be a consistent approach on how buy now, pay later loans are treated within credit reporting agencies. I'm not sure whether that requires a CFPB rule, as opposed to the CFPB working with the industry and the credit reporting agencies to help move that forward. I don't necessarily think the CFPB is in a position to dictate this, but it is in a position to try to really push for a consistent approach to be developed.
If the CFPB issues something, guidance or rule, it's likely it would cover credit reporting. My hope would be that it would cover more than credit reporting, including these other issues that are well-known.
The paper mentions some BNPL providers beginning to implement more responsible practices. Can you provide examples of those you observed?
I don't think I can specify the names of the companies, but there are buy now, pay later companies that have specifically chosen not to charge any late fees. I was struck by the wide variance in late fee practices. Some companies don't charge a late fee, some do. Some charge from one day late, some charge from 10 days late. Some reserve the right to charge multiple late fees for a single missed payment. And this is all in addition to the size of the late fee. We had one example of a consumer charged a $40 late fee for a $70 purchase. It's well known that there is an issue with late fees, both the size and lack of transparency around the application of it. Because this issue is well known, we did see some buy now, pay later companies, including new entrants in the market, choosing specifically not to issue any late fees as part of their model.
