It may be tempting to look for new ways to manage personal finances. For example, one of the latest credit options is to use a so-called “buy-now, pay-later” app, which can fund your purchase today and act as a digital layaway platform until you can fully repay the debt.
Considering this type of app is a new concept, it’s not fully regulated like banks or mortgages, at least, not yet. But for now, the question remains: Can buy-now, pay-later apps be trusted with my personal data?
Recent regulatory insight into buy now, pay later highlights the risks tied to this growing credit option. Federal authorities have concerns that the answer to the above question may be “no.”
The Consumer Financial Protection Bureau recently asked several buy now, pay later, or BNPL, providers for information related to some concerns it has about short-term installment plans. Its concerns included some typical consumer-protection issues, such as whether customers are clear about when payments are scheduled and policies around late fees.
The CFPB issued orders to BNPL apps Affirm, Afterpay, Klarna, PayPal and Zip to explain how they gather detailed information about consumers´ shopping behavior, fees, loan performance, users´ demographics, data collection and other elements of their business models. The companies have until March 1 to send the information to the CFPB.
The CFPB also said it was exploring questions about “data harvesting” from “valuable payment histories.” BNPL lenders have access to the valuable payment histories of their customers. Some have used this collected data to create closed-loop shopping apps with partner merchants, pushing specific brands and products, often geared toward younger audiences. As competitive forces pressure the merchant discount, lenders need to find other sources of revenue to maintain growth and profitability.
BNPL is marketed as an alternative to credit cards because they allow consumers to spread out purchase financing, but with no fees or interest charges. During the pandemic, with consumers conserving cash and seeking alternative methods of credit, the service exploded in popularity.
There are two distinct categories:
- Point-of-sale lenders (Affirm, PayPal Credit), which usually apply to larger purchases such as Casper mattresses or Pelotons, are repaid over longer periods, require credit checks and charge buyers interest.
- Pay-in-four services (Klarna, Afterpay), which charge no interest, require a 25% deposit and operate without credit checks or reporting to credit bureaus.
As this payment method is increasingly gaining popularity as a payment method of choice, so is the fraudulent activity. Criminals exploit weaknesses in the application process for BNPL loans and steal items ranging from pizza to video game consoles. Experts warn that scammers steal people’s identities or take over their accounts to evade detection, making unsuspecting victims foot the bill.
Account takeover attacks can also occur on these platforms with fraudsters using bots to exploit weak passwords or purchase stolen credentials from websites on the dark web.
Here’s the good news: BNPL may now give consumers another option to build good credit.
Equifax, early next year, will begin recording payments on more BNPL plans. This could potentially help provide a picture of a consumers’ overall debt picture with BNPL included.
A recent study by Equifax found that most consumers were helped by having an on-time buy-now, pay-later trade line in their credit file. Those consumers’ credit scores increased by 13 points, on average. However, an identity theft and credit monitoring service that can track your credit may keep you up to speed on any unusual changes to your credit and protect you from damage caused when your accounts get taken over.