Buy now, pay later and spy on consumers

Yesterday, the Consumer Financial Protection Bureau (CFPB) issued a report on the business practices of leading buy-it-now, pay-later (BNPL) companies Affirm, Afterpay, Klarna, PayPal and Zip. When the CFPB announced the investigation last year, director Rohit Chopra described the BNPL as “the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product. immediately but also gets the debt immediately”.

Earlier this year, I reported about how the expansion of BNPL services threatened traditional financial institutions by imposing higher trading costs on retailers, thereby reaping greater profits. “Retailers are cost eating,” I wrote, as BNPL users spend 68% more than non-BNPL users, in addition to shopping 20% ​​more often. In many cases, consumers also did not realize that the easy line of credit offered by BNPL lenders was another form of debt, without the protections offered by traditional lines of credit.

Investors are attracted to BNPL’s services due to their use by early adopters of Generation Z and Millennials. However, the CFPB report shows that the adoption of the BNPL increased in all age groups except the over 51s.

Once used for small items such as clothing, BNPL loans are now used for essentials such as races, healthcare payments, gasand even mutations such as “nanodegreesthrough Affirm’s partner company Udacity, which markets itself as “Learn now, pay later”. purchases in 2019, accounted for just 58.6% of purchases in 2021, even though Chopra said BNPL usage has increased almost tenfold over the past two years.

More from Jarod Facundo

Whatever service you’re thinking of, substitute the “buy” and there’s probably a BNPL option available, or soon will be. For example, Afterpay offers its BNPL services for airline tickets via Fly now, pay laterwhile the smallest BNPL lender, Zilch, even offers BNPL loans for dine out.

Market expansion should come as no surprise. When announcing the CFPB report, Director Chopra put it simply, “Buy now, pay later can be compared to a credit card that incorporates this infomercial-style payment plan.”

This is then supercharged by “building business models that are truly dependent on digital surveillance.” In other words, BNPL companies are capitalizing on how e-commerce reveals tons of customer data, which previous financial titans like banks, credit unions and credit card companies did not have access to or generally avoided. Chopra continued, “Increasingly, buy now, pay later businesses can leverage data and UI design to gamify purchases and loans, driving repeat use and incremental revenue. “

While the increase in purchases is not necessarily a bad thing, on the consumer side, the CFPB report points out that the rate of late fees has increased along with the loan approval rate, which means that more people have access to credit that they cannot afford. For example, the report indicates that consumers are using credit cards for their BNPL purchases – potentially accruing interest through the former if they do not pay off their credit card balance – on an alleged BNPL loan without interest, nullifying the discourse that BNPL companies offer to consumers. It’s about “paying credit with credit,” the report notes. While not a significant part of BNPL’s business model, the report also states that late fee revenue increased from 4.8% in 2020 to 6.9% in 2021.

Chopra said BNPL companies “harvest and leverage our data to grow revenue outside of their core lending business in ways we don’t necessarily see with other lending products.”

On the issue of return policies, a consumer told the CFPB that a BNPL lender refused to recognize and follow its own dispute resolution policies, instead blaming the consumer for not attempting to contact the trader instead.

These inconsistent consumer protections are exacerbated by what the CFPB calls loan stacking and sustained use, referring to borrowers who take out multiple loans at once and are unable to repay them. Others run the risk of not being able to pay rent, utilities, mortgages, car loans or student loans. In the short term, defaulting borrowers can be kicked out of their BNPL service. In the long term, sustained use presents the risk of “continued access to an often increasing amount of BNPL credit and a personalized product discovery engine…unlike loan stacking, which can happen almost instantaneously, a sustained use may take months or even years to fully appear.”

The CFPB admits that sustained use is not a risk unique to the BNPL industry. However, BNPL’s services may amplify these risks. Parallels are therefore attracted to personal loans which are also structured as fixed installments, and generally lower than a car loan or mortgage, resulting in lower payment amounts overall. According to a 2017 study published by one of the national consumer information companies, TransUnion, consumers surprisingly prioritized personal loans rather than car loans, mortgages and credit card payments. “Unlike mortgages and car loans, personal loans are not secured by valuable personal property,” the report said. “And unlike credit cards, which provide access to future credit, personal loans have virtually no future use.”

Thus, despite the lack of future value for consumers, due to the gambling nature of BNPL products through its data collection practices, and the fact that BNPL lenders impose an automatic payment plan on borrowers, the risk to long term of sustained use persists.

UNDER TRANSPARENT USER EXPERIENCE, Chopra said that BNPL companies “harvest and leverage our data to grow revenue outside of their core lending business in ways we don’t necessarily see with other lending products.” The result is that, unlike credit card companies who may simply offer a line of credit or rewards programs, BNPL companies, through their proprietary interfaces, “can use our data to determine what products we see through the placement of paid products… this opens the door to a host of potential issues such as digital dark models and even custom pricing.

When asked to elaborate on personalized pricing, a CFPB official said: “The concern we have with data in general is that once a company has [a consumer’s demographic, transactional, and behavioral] data, it’s unclear exactly where the line will be drawn and what they might do with it in the name of revenue generation. The CFPB official cautioned: “We cannot confirm that any specific lender is engaging in any specific practice along these lines at this time.”

Still, that wouldn’t be too much of a stretch to imagine. For example, as I reported earlier this year, 53% of low-income consumers cited affordability as a reason for using BNPL, and by race, 51% of black consumers cited affordability versus 36% of white consumers.

And while the report doesn’t specifically cite “personalized pricing,” it does include a section on enhanced user experiences powered by “dark patterns.” This refers to what tech executives call “data-driven UX changes” informed by user engagement, which simply point users in a particular direction that benefits the business. For a concrete example, Vox signaled how Instagram asked if they could use consumer app and website activity to deliver better personalized ads. Meanwhile, disabling required users to press a dark button above the bright blue.

A new Federal Trade Commission (FTC) staff report on digital dark patterns released the same day as the CFPB report echoes Chopra’s concerns. The FTC report states that “dark patterns may differentially impact low-income consumers or other vulnerable populations who are more likely to rely on a mobile device as their sole or primary Internet access.” The report goes on to highlight a Pew Research Center study that detailed how a quarter of Hispanic households and 17% of black households depended on a smartphone for internet access, compared to just 12% of white households.

Self-reported data to the CFPB by major BNPL companies only goes through the end of 2021, meaning that while the report provides a blueprint for future regulatory action, BNPL market maturation is a long way off. be terminated, leaving consumers to bear the risk until then.

Kayleen C. Rice