Unregulated “buy now, pay later” schemes could create a debt trap, bank advocates say

Banking advocates have told regulators that buy-now-pay-later options can create a debt trap for consumers. (one)

The Consumer Financial Protection Bureau (CFPB) opened an investigation BNPL (Buy Now, Pay Later) providers in December, and now banking advocates are warning of the potential debt trap this financial offering could create.

BNPL allows consumers to split the cost of their purchases into smaller installments that can be repaid over a period of weeks or months. BNPL providers like Sezzle, Klarna and Afterpay work with merchants and offer interest-free payments, but may levy late fees or other penalties if a buyer doesn’t pay on time.

“BNPL has taken the nation by storm, but the simplicity and convenience offered by the product has also raised legitimate questions about whether users are getting the high level of protection they deserve from under-regulated fintechs that control much of the market, but do not adhere to the same federal oversight as America’s leading banks,” the Consumer Bankers Association (CBA) said in a March 22 statement.

As part of its investigation, the CFPB has sent instructions to Affirm, Afterpay, Klarna, PayPal and Zip to collect information about BNPL risks and benefits. The CFPB explained at the time that it was dealing with debt accumulation, product regulation and data collection.

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BNPL could increase debt burden

The CBA explained that unlike traditional banks, fintech companies are not regulated to ensure they verify a consumer’s creditworthiness or ability to repay during the approval process. The CFPB investigation into BNPL could eventually lead to a tightening of BNPL regulations.

“Unaffordable loans can provide a quick cash inflow, but over the longer term – which in BNPL’s case may be as little as a few weeks or months – unregulated fintech products can add to the debt burden of consumers who are already overwhelmed by debt,” said Mike Calhoun , President of the Center for Responsible Lending (CRL) “Now is the time for regulators to rein in BNPL.”

BNPL usage is on the rise, increasing by about 300% every year since 2018 Bloomberg. And the traditional online financing option has also started to expand to brick-and-mortar retailers through mobile payment options. Klarna recently announced a multi-year partnership with Brookfield Properties, a global real estate developer and operator, to bring its payments to Brookfield’s portfolio of more than 150 shopping centers across the United States

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CFPB should focus on regulating 3 categories, bank advocates say

The CBA advocated that the CFPB consider some recommendations to ensure consumer safety when using BNPL services. Researching BNPL providers is the first step in creating a level regulatory playing field.


Lenders assess a borrower’s creditworthiness by reviewing their credit history to determine if their credit profile is good enough to obtain the loan they want. Lenders look at how much debt a borrower owes, their creditworthiness, whether they will repay their debt on time, and more.

“Ensuring that non-bank fintech providers apply proper creditworthiness analysis will help strengthen consumers’ financial health and mitigate their potential for accumulating unwanted and unsustainable debt,” the CBA said.


The CBA advocated a standardized, simple disclosure statement to ensure consumers are adequately informed about the products they use. This could help inform consumers about late fees and other penalties if they don’t make their payments on time.


Protecting data and personal information online is a growing concern as cyber security threats become more prevalent. The CBA wants the CFPB to review and enforce fintech privacy laws to ensure sensitive information remains private.

If you have been using BNPL products and are unable to keep up with payments, a personal loan could help you pay off your debt. Contact Credible to speak to a credit expert and see if this is the right option for you.

Do you have a financial question but don’t know who to contact? Email The Credible Money Expert at [email protected] and your question could be answered by Credible in our Money Expert section.

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