The Buy Now, Pay Later (BNPL) industry has boomed over the past few years, with the number of BNPL users in the U.S. almost quadrupling since 2019, rising from 11.6 million in 2019 to 45.1 million in 2021.
While this type of financing option is appealing to consumers as an alternative to traditional credit cards, the lack of regulatory oversight has caused quite a few consumer protection concerns and regulators across the globe are starting to take notice. Will 2022 be the year that BNPL becomes "officially" regulated?
Consumer Protection and Regulatory Concerns
On the consumer protection side, one of the main criticisms of BNPL is that it could encourage shoppers to spend more than they can afford, particularly for younger millennial and gen z shoppers. There are also fears over how easily consumers can get into debt, sometimes without even realizing, since there are no hard credit checks involved.
On the regulatory side, many BNPL products fall outside of key consumer protection laws that protect consumers from predatory or deceptive lending practices. One example of this would be for the Truth in Lending Act (TILA), which requires "5 installments" before the regulation is triggered… but, most BNPL models provide repayment installments of only 4, skirting just outside the regulatory obligations of the TILA.
Regulatory Movement in 2021
A CFPB Blog-A Warning to BNPL Companies?
In July of 2021, the Consumer Financial Protection Bureau (CFPB) published a blog post titled "Should you buy now and pay later?" that warned consumers of the potential risks of BNPL compared to traditional credit options. While the CFPB has yet to explicitly begin regulating this industry, the blog served as a warning to all BNPL issuers of tougher regulation ahead.
First Enforcement Action Against a BNPL Lender
Also in July of 2021, the Bureau took its first enforcement action against a BNPL for failure to provide adequate and sufficient training to its merchants.
The BNPL lender enabled contractors and other merchants to take out loans on behalf of thousands of consumers who did not request or authorize them. Merchants were required to obtain written authorization from consumers in order to submit a loan application. However, the lender failed to review this documentation before approving the loan and disbursing loan proceeds-only requiring merchants to provide proof of consumer authorization after a consumer filed a complaint. As a result, the Bureau required the lender to refund the accounts or cancel the loans of customers harmed by the conduct up to $9 million, implement enhanced loan authorization and verification procedures to prevent unauthorized loans from being issued in the future, and pay a civil penalty of $2.5 million.
Open Inquiry into BNPL
A few months later on December 16th, 2021, the CFPB opened an inquiry into BNPL credit and issued a series of orders to five BNPL companies to collect information on the risks and benefits of these fast-growing loans. These orders went to Affirm, Afterpay, Klarna, PayPal, and Zip.
Specifically, the Bureau is concerned about:
- Accumulating debt: If a consumer has multiple purchases on multiple schedules with multiple companies, it may be hard to keep track of when payments are scheduled. And 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. Because of the ease of getting these loans, consumers can end up spending more than anticipated.
- Regulatory arbitrage: While the BNPL application may look similar to a standard checkout with a credit card, protections that apply to credit cards may not apply to BNPL products. Many BNPL companies do not provide dispute resolution protections available to users of other forms of credit, like credit cards. And finally, depending on what rules the lender is following, different late fees and policies apply.
- Data harvesting: As competitive forces pressure the merchant discount, lenders will need to find other sources of revenue to maintain growth and profitability. The Bureau would like to better understand practices around data collection, behavioral targeting, data monetization, and the risks they may create for consumers.
As part of this inquiry, the Bureau is working with its international partners in Australia, Sweden, Germany, and the U.K, specifically the Financial Conduct Authority.
In general, we saw more regulatory movement internationally than domestically for the majority of 2021.
At the beginning of 2021, the Financial Conduct Authority (FCA) stated that 'billions of pounds were being lent in unregulated transactions' and that more than 10% of consumers who had used a BNPL option were already overdue. This led to a review of the unsecured credit market, led by Christopher Woolard, former interim Chief Executive of the FCA, which urgently recommended regulating all BNPL products,
The Woolard Review set out 26 recommendations for the FCA, UK government, and other bodies to reform the unsecured credit market, stating:
"As a matter of urgency, the FCA should work with the Treasury to ensure the necessary amendments to legislation are made to bring BNPL products within the scope of regulation. Once the necessary powers are obtained the FCA will need to develop a proportionate regulatory framework including addressing how credit information should work within this market"
The recommendations take into account the impact of the COVID-19 pandemic, changing business models, and new developments in unregulated BNPL unsecured lending. The Financial Conduct Authority’s board supported the report’s recommendation and agreed that there “was a strong and pressing case to bring buy-now-pay-later business in regulations."
In July 2021, the FCA published its 2021/22 Business Plan, which stated "Deferred Payment Credit: The Woolard Review recommended bringing the currently exempt Buy Now Pay Later sector (now referred to as 'Deferred Payment Credit') into regulation. Subject to the Treasury's consultation on the scope of the regime, we plan to consult on new rules in 2022 and are developing our approach to the authorization gateway and supervision."
Sweden passed the Swedish Payment Services Act in 2020, aimed to discourage online shoppers from paying with credit-including BNPL products. The Act requires merchants to present the payment methods that do not put the consumer into debt and forbids them from pre-selecting paying by invoice or installment loans in their online checkout.
BNPL providers enjoyed a relaxed regime in Australia, as the provisions of the Australian National Consumer Credit Protection Act of 2009 do not apply to certain types of loans, including short-term interest-free credits. The industry has eventually adopted a self-regulatory approach.
The Australian Finance Industry Association (AFIA) announced on the 1st of March 2021 that its Code of Practice for the BNPL sector has come into effect. According to their statement, 'AFIA's BNPL Code goes above and beyond the law in Australia, setting best practice standards for the sector and strengthening consumer protections. It does this while preserving customer choice to make purchases and payments in a way that suits their needs and preferences.'
BNPL providers that are compliant with this Code must carry out assessments before a customer can make a purchase and conduct additional checks to prevent consumers from stretching their arm further than their sleeve will reach. BNPL disputes under the code will be managed by the Australian Financial Complaints Authority, where a designated committee will have the power to publicly denounce companies that provide loans services outside the Code's standards.
In November of 2021, the Financial Consumer Agency of Canada (FCAC) published a study on BNPL services with the goal of broadening the Agency's understanding of the BNPL market in Canada, from the perspective of Canadian consumers.
Among other things, the study found that BNPL consumers aged 18 to 34 are most likely to use an online BNPL service, whereas users 65 and over appear more likely to use a credit card-based service. The most common reasons consumers use BNPL services were to help with budgeting, to afford a purchase that they would not be able to afford by paying all upfront, and to avoid interest and fees.
What's to Come in 2022
We're not even a full month into 2022 yet, and there are already some signs of regulatory movement across the board.
On January 6th, the U.K Treasury closed a public consultation on BNPL with the clear intention of bringing BNPL products into regulation. According to the questions included in the consultation paper, the areas that are likely to be regulated include Business Model, Customer Education, Contract Definitions, Advertising, and Creditworthiness. U.K regulators are likely to propose new rules in the first half of 2022.
In the U.S, the companies included in the CFPB's investigation have until March 1, 2022, to submit their responses. If the data collected from the CFPB probe suggests that BNPL offerings pose risks to consumers, there will likely be regulations that target providers next year. Most recently, the CFPB published a notice in the Federal Register seeking public comment to inform its inquiry into BNPL products. The deadline to file comments is March 25th, 2022.
In the midst of all this uncertainty around the fate of BNPL regulation, there is one thing that is certain-being protective in consumer protection and compliance initiatives is key to getting ahead of any anticipated regulatory scrutiny, no matter what it looks like.
Join the other BNPL leaders working with PerformLine to proactively onboard and monitor their merchant partners to make their marketing compliance scalable, actionable, and efficient. Our team of experts is ready to help!