In a recent webinar, Gary Stein, US Chief Product & Compliance Officer at Opy, and John Zanzarella, VP at PerformLine, sat down to discuss what lies ahead for the buy now, pay later (BNPL) industry and how organizations should prioritize their compliance initiatives to ensure a successful future.
Below is an excerpt from the discussion. For full insights, watch the webinar on demand here.
The Growth of the BNPL Industry + What's Next
John: "Throughout the pandemic, we saw huge increases in usage of BNPL for purchases online, specifically from some of the younger generations. But more recently, there’s a number of different contributing factors to some of the decline in usage of BNPL and a shift in some consumer sentiment. And of course, because of that, we’ve seen some consolidation of BNPL companies and some layoffs. But through that, some of the companies continue to grow, continue to get funding, and Opy is one of them. So, why don’t you talk a little bit about the business model at Opy and what you think is next for the industry as a whole?"
Gary: "There’s a lot of things that drove BNPL taking off. Let’s face it-the fact that we were all confined to our homes and had nothing to do but shop online is going to boost anything connected to an online shopping industry. Planned or unplanned, I think that helped to move forward the BNPL industry.
I think also-this has always been my theory-we’re seeing the impacts of the CARD Act play out a little bit, where younger consumers aren’t getting credit cards as early, or at least embracing the use of them. And so, they’re a little riper for other forms of credit that they might feel it’s more custom-tailored to what they’re doing.
A lot of what’s now coming to be known as BNPL (and while I won’t say disassociate, but would, would at least talk about ourselves in an evolved state from that) is kinda this pay-in-four model where consumers can split the purchase up into four payments for no fee and, in the US, that removes some obligations from the Truth in Lending Act (TILA). I think that my old employer (the CFPB) and others are helping to provide some guiding light for that by pointing out where they see weaknesses in the armor.
When we moved to the U.S, we thought, ‘we’re not going to start where everybody else is.’ There’s a 'land-grab' going on in the e-commerce space.
For example, a year ago, we had a consultant working with us who was buying some glue for a home repair. It was $6 for the glue, and got the offer to split it up into four easy payments of $1.50. More recently, I have seen burritos being offered on a pay-in-four model. You can get some big burritos at some places, but it’s not enough to spread the cost over two months or anything like that. So, I do think there’s some over-proliferation.
So we’ve tried to build a lasting model here. We came in and we looked at places where BNPL wasn’t prevalent, like bigger target ticket markets where you couldn’t do pay in four because there’s too much risk. And so we started in dentistry, veterinary, and other non-discretionary areas.
There are some entrenched players in those markets, but we think we stack up really well. So, rather than battle everybody in a crowded retail space where everybody looks the same, we can go in there against players that are using private label cards or deferred interests programs-you know, things that aren’t necessarily always transparent about how the costs the consumer may bear-and go in with the value proposition that says: look, we do charge fees. This is still a credit. But there’s no compounding interest, and there’s no surprises. There’s no gimmicks. There’s no gotchas. You know what we quote you is what it’s going to be. There’s no interest rate escalation. There’s no balloon payment. There’s no deferred interest.
People want to know what their monthly obligation is going to be. Can they afford to do this? Can they afford to repair the car that takes me to and from work in a post-covid world?
They're not sure if they can afford $3000 on their credit card because they have time to pay it off. But, if they know this is going to cost them $95 a month for 12 months and the repairs will last that long, they can do this, and it’s a good value tradeoff. So, we’re helping customers make more informed decisions, giving them greater confidence and control, and putting them into position to be better borrowers."
Proactive vs. Reactive Approach to BNPL Compliance
John: "I look at it as proactive versus reactive when it comes to compliance. Our company has been around for 15 years and I remember times where people would talk about compliance as more of a reactive thing.
I remember meeting you early on as we were getting to know Opy and one of the goals was to have some automated compliance tools in place in advance of launch to be buttoned up. Could you just talk a little bit about that? And from a regulatory standpoint, it seems like the regulators are really looking for companies to be more proactive. Is that your take on as well?"
Gary: "You know, they don’t always come out and say it, but I do think they imply it. So it’s funny. I was a consultant before I joined the CFPB and I like to joke that if I was working on a new product rollout, to me, legal and compliance were just two month delays on any project. Like, 'we gotta run it by these guys.'
And John, you said it very well. I agree with you, and this is what I tried to embrace at the Bureau. If you do this at the beginning-which is what we tried to do as we formulated for the US-you’re not 'jerry rigging,' oh we have to add this here or that there. You’re really trying to build it in what’s the right way to do this ahead of time. Think about, how do we want to set this up? That means engineering your flows and your work processes, but also everything you do around that to manage that compliance, and that includes how we think about our marketing and our messaging to consumers and how our partners do that.
I’d be lying if I didn’t say that just like every other organization, we identify issues, we have to implement corrective action, but we do try to get it out in front of them and we try to go through a rigorous review process and everything to minimize the surprises."
The CFPB's Next Move(s) for BNPL
John: "In December, the CFPB opened an inquiry into BNPL. As part of that, they asked five key players to provide data intended to clarify some of those risks. Those firms submitted information on March first separately. And, worth noting, in April, the CFPB invoked a dormant authority to examine nonbank companies posing risks to consumers.
What do you think the next few moves might be from the CFPB based on what they’ve done so far?"
Gary: "I do think they’ve helped to highlight a number of areas where they see potential consumer vulnerabilities in the marketplace. I can tell you from being there, and I was on the policy making side, the Bureau doesn’t have unlimited bandwidth.
Rule writing is not easy so they have to figure out what’s the best way to apply corrective action in a market?
Some of these early steps they take to collect information and the questioning they take provide some hints to the marketplace about how they’re thinking about things, and that alone can help drive the industry in the right direction. I think we all want an efficient marketplace, and regulation can tax on that. If the regulators can work with the innovators, and be of like mind, that can go a long way. And I think some of those actions speak to that. Having said that, there could be follow up actions the Bureau could take.
One of the things about our model is that we partner with Cross River Bank. They are a lender of record as a depository and are directly regulated by federal regulators. As their service provider, we can always be examined as part of that. So, the Supervisory Action might clarify and facilitate some steps, but the Bureau has had numerous avenues for being able to look at entities that might not be directly under their authority before. It may or may not change things dramatically.
Having Cross River Bank as a partner is like having a personal trainer. When you go to work out, they’re gonna make sure you do it the right way. And so, we can’t change our business model or put out marketing or anything without their review. They’re giving it the lens that they know their regulators are going to give them.
Other players in the marketplace, by not having that by not taking on that relationship, or maybe not hiring people that were former regulators to help set up their shop, are gonna learn some things the harder way, and they have to make some business adjustments as a result of that.
What’s interesting about the Bureau looking at that is, and especially again, I’ll use the term 'land grab' that we see going on there. Like you said, there’s been mergers, there’s fallout, there’s falling stock prices, and-we know it ourselves-that those economic pressures can do as much sometimes to change the marketplace as a regulator."
Making the Case for More Compliance Resources
John: "Everyone on this webinar today wants to get better at preparing their company for the regulations to come and being compliant, but not all of their organizations have leadership who sort of lead with that culture of compliance. So, if you were someone working in the BNPL space who was maybe more on the day-to-day or managerial level, what are some of the things that you could do internally to help make the case for more resources, or more budget, to stay ahead of some of these regulations?"
Gary: "Luckily, there’s enough guidance from the regulators about what makes for a sufficient compliance management system.
You can provide all those things and say, 'here are the expectations, we could get audited at any time by a state or the federal regulator and so, we need to be able to show documentation of these, and we need to have a record of capturing consents. We have to have a complaint management system and all those things.' Laying all that out early is important.
One key element of a compliance management system (CMS) is board training and management training and taking them through what the requirements are. That becomes at least a forced communication of laying all those requirements out. One of the things that we’re doing at Opy, and I wish we had it yesterday, is putting together a marketing playbook.
One of the areas that we have among the greatest debates about is-we want to get this message across that we're better than our competitors, but there are certain things you can say you can’t say. And there seems to be a very heightened focus on substantiation of statements and things.
And what’s interesting about it is, while there are 'do’s and don’ts' from a regulatory standpoint, we also have 'do’s and don’ts' from a marketing standpoint because we want to make our value proposition wring out clearly to consumers. And if we’re not disciplined about how we’re talking about that, then we may not violate the law, but we’ve confused the marketplace.
So, that’s an example of something that we’re trying to do, too, to provide folks with advance understanding, so they’re not looking at it as 'I gotta get this through the compliance gauntlet.'"
PerformLine: The Preferred Compliance Solution for BNPL and Point-of-Sale Financing Organizations
"PerformLine makes it easy to monitor all of our merchant partners' sites for compliance. We're excited to have full visibility into our merchants' advertising and to find and remediate any potential issues quickly."
- Gary Stein, Opy
As the industry continues to see accelerated growth, astute brands are putting in place a nimble and effective marketing compliance program using PerformLine's comprehensive omni-channel technology to proactively support their consumer and brand protection efforts alongside their brand's continued maturation.
Learn more about PerformLine's compliance solutions for the BNPL and point-of-sale financing industry by requesting a custom demo here.
