The Consumer Financial Protection Bureau demanded information from the biggest buy now-pay later providers Thursday, saying it’s concerned that consumers using the popular financing tool may accumulate too much debt as their purchasing data is mined for marketing.

In a press release announcing the order, the federal agency said it’s seeking information on the "risks and benefits of these fast-growing loans" from the companies Affirm, Afterpay, Klarna, PayPal and Zip. 

Digital payments giant PayPal and BNPL provider Affirm are based in the U.S., while Klarna is based in Sweden and Zip is headquartered in Australia. Afterpay’s business grew up in Australia, but it was purchased in August for $29 billion by the American digital payments company Square, now known as Block.

The “BNPL” financing option offered by some merchants lets consumers buy everything from cosmetics to electronics with an initial payment, plus a series of partial payments over weeks, typically without paying interest. It’s become popular particularly with younger shoppers, who may not have the cash to pay all at once. The catch is that buyers who miss payments may be socked with fees or dinged on their credit reports.

"Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too," CFPB Director Rohit Chopra said in the release. "We have ordered Affirm, Afterpay, Klarna, PayPal, and Zip to submit information so that we can report to the public about industry practices and risks."

The federal agency, likely looking to flex its muscle under Biden administration leadership, said it’s concerned about "accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology."

The companies responded to the order in a cooperative spirit. A PayPal spokesperson said by email: "Our customers trust us to be transparent and we take this responsibility very seriously. PayPal is reviewing the letter and we will continue to work productively with the CFPB to provide information as requested."

"We welcome the CFPB’s review and support regulatory efforts that benefit consumers and promote transparency within our industry," an Affirm spokesperson said, adding that "for nearly a decade, Affirm has been advancing its mission to deliver honest financial products that improve lives, and we have never charged a late or hidden fee, ever."

A Klarna spokesperson said: "We believe proportionate regulation is a good thing." The company added in the emailed statement that it believes it has provided consumers with "an interest free, fair and sustainable alternative to credit cards."

"Zip has always believed in transparency and we welcome the opportunity to continue sharing insights with the CFPB’s research and markets division," the company said in an emailed statement. "We have a shared mission to prioritize consumer financial wellbeing and as such we applaud the CFPB’s dedication to consumer protection."

Afterpay parent Block didn't immediately respond to a request for comment.

Congressional concern

Spurring the CFPB on may have been a Wednesday letter from a group of six Democratic U.S. senators, including former presidential candidate Sen. Elizabeth Warren, who helped create the CFPB. They pressed Chopra to take action to increase oversight of BNPL services. The senators alleged that "many BNPL providers" may be skirting laws, such as the Truth in Lending Act or the Military Lending Act, by how they structure their services because such laws generally apply to loans with more than four installments or those with a finance charge.

"Nonbank BNPL providers currently operate without meaningful oversight," the senators’ letter added. "They are not generally subject to federal supervision that can spot unfair, deceptive, or abusive practices or other violations of federal consumer protection laws."

The senators also expressed concerns about consumers getting in over their heads with respect to debt, and damaging their credit histories with missed payments. "Clear underwriting standards and expectations could protect consumers from overextending themselves," the letter said. 

The other senators signing the letter included Sherrod Brown of Ohio, Jack Reed of Rhode Island, Chris Van Hollen of Maryland, Jon Ossoff from Georgia and Tina Smith of Minnesota.

At a November hearing of the House Financial Services Committee’s Task Force on Financial Technology, consumer advocates and industry trade group representatives debated the benefits and risks of the BNPL financing options, with Congress members taking a serious interest in the product.

Potential pitfalls for consumers

The CFPB expressed apprehension about some consumers becoming everyday users of BNPL for small purchases, and contrasted that financing with old-school layaway programs that were used in the past mainly for big-ticket items. The agency painted the easy-to-use BNPL phone apps and allure of interest-free terms as a slippery slope to problems. 

"If a consumer has multiple purchases on multiple schedules with multiple companies, it may be hard to keep track of when payments are scheduled,” the agency said in the release. “When there is not enough money in a consumer’s bank account, this can potentially result in charges by both the consumer’s bank and the BNPL provider."

Some Gen Z users are apparently already encountering those challenges, lamenting the money they owe for BNPL purchases in videos posted on TikTok and other social media sites.

The agency said it's also worried about BNPL providers' access to consumers credit histories and the companies partnering with merchants to market to consumers using that information, particularly when it comes to younger shoppers. "The Bureau would like to better understand practices around data collection, behavioral targeting, data monetization and the risks they may create for consumers," the release said.

In the release, the agency also alerted consumers to the fact that BNPL checkout procedures may look like that of a standard credit card purchase, but may not provide the same consumer protections, including the ability to dispute a transaction later.

The agency put BNPL providers on notice that they may be violating some laws. "Some BNPL companies may not be adequately evaluating what consumer protection laws apply to their products," the agency said in the release. "For example, some BNPL products do not provide certain disclosures, which could be required by some laws."

Mushrooming BNPL industry

The BNPL industry has mushroomed over the past two years as the deadly COVID-19 pandemic led at-home shoppers to try the new digital payment tool, and it spooled up even more this year during year-end holiday shopping on Black Friday and Cyber Monday. 

The BNPL option has been available in some places for about a decade, but was mainly a phenomenon outside the U.S., until recently. Pioneers like Melbourne-based Afterpay got the trend going in Australia, then others, such as the Swedish company Klarna, picked up on it in Europe, and later the approach arrived in the U.S. As international players flocked to the U.S. market, homegrown enterprises jumped into the BNPL ring, too.

The companies continue to expand their reach, with new partnerships, acquisitions and product add-ons. Last year, the Australian company Zip furthered its U.S. growth with a $296 million acquisition of QuadPay. In August this year, with competition heating up, online retail juggernaut Amazon struck a deal for BNPL services with Affirm.

The BNPL craze has spurred traditional payments players, such as credit card companies, and venture capital investors to get into the business, too. Digital payments behemoth Block, formerly known as Square, paid $29 billion to acquire Afterpay in August.

Afterpay Co-CEO Nick Molnar told Payments Dive that month that he believes it’s "early days" for BNPL with only 2% penetration or less across the world market. 

BNPL appeal

The CFPB zeroed in on the notion that the deferred payment tool targets consumers with little, poor or no credit history. "Lenders have touted BNPL as a safer alternative to credit card debt," the CFPB release said.

The agency also noted the appeal of BNPL for merchants, who sacrifice 3% to 6% of the transaction value as a fee to BNPL providers, but reap the reward of increased sales.

In its campaign to review the industry, the CFPB said it’s acting in concert with other governments from around the world, notably the Financial Conduct Authority in the United Kingdom, which has recently turned the spotlight on BNPL businesses. The U.S. agency is also partnering with government authorities in Sweden, Germany and Australia.