What Will Pending BNPL Regulations Mean for Businesses?

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BNPL adoption has experienced phenomenal growth, capturing the attention of regulators who want to protect consumers and lenders.

Buy now, pay later (BNPL) has experienced astronomical growth in the past few years. Statista reports that BNPL lending in the U.S. totaled about $3 billion in 2019. However, that amount climbed to $77.3 billion in 2022 and is expected to reach $143.44 billion by 2026. To understand the boost this payment method has received in the past few year, just look at the timeline. The COVID-19 pandemic resulted in increased unemployment, surging to 13% in Q2 2020. Additionally, inflation spiked to 7% in 2021, putting more pressure on cash-strapped consumers. So, when kitchen appliances or electronics failed, parents needed to provide necessities for their children, or other needs arose, BNPL made it possible to pay for the purchases on a budget.

BNPL gives consumers the opportunity to divide the cost of a purchase into four or more payments, pay one upfront, then pay the remaining three over the next several weeks, at low interest or interest-free. The payment method, which gained popularity among ecommerce consumers, is now in demand wherever they pay, including at the in-store checkout and not just for one-off, big-ticket purchases but, increasingly, for necessities.

Why BNPL Has Captured Legislators’ Attention

The growing adoption of BNPL has put the payment method on government regulators’ radar. The Consumer Financial Protection Bureau (CFPB) published the Buy Now, Pay Later: market trends and consumer impacts report in 2022, which highlights potential issues and areas of concern with BNPL.

“The CFPB pointed to higher BNPL approval rates in 2021 in tandem with the sector’s fast growth,” says Omri Flicker, Chief Legal & Risk Officer of Splitit. “Tighter economic conditions and easier access to instant BNPL credit have led to skyrocketing loan defaults among legacy BNPL providers in 2022. The CFPB also found that late fees are climbing, with 10.5% of customers being charged at least one BNPL late fee in 2021, versus 7.8% in 2020.”

Because BNPL is a unique type of payment method, it falls outside the requirements to comply with regulations that govern credit cards. For example, consumers have few dispute options as they do with credit card chargebacks, and in some cases, they may have no choice but to agree to automatic payments.

“Data harvesting and digital surveillance have also come into the sights of the CFPB,” Flicker points out. “They pointed to the fact that BNPL firms are harvesting and leveraging data in ways they don’t see with other companies. Through their proprietary interfaces, BNPL providers can see which products consumers buy through product placement. The CFPB wants to ensure that BNPL firms are subjected to the appropriate examination just like regular credit card firms.”

In addition, consumer disclosures with BNPL aren’t regulated. It’s possible that a consumer could make a BNPL purchase without fully understanding fees or what the penalty for not repaying on time could have.

Lawmakers are also eyeing the impact that increasing adoption of this payment method can have on BNPL lenders and merchants. BNPL companies don’t have the same approval processes that credit card companies use or share data with credit reporting organizations. “BNPL borrowers can easily end up taking out several loans within a short time frame from multiple BNPL lenders, because most BNPL lenders do not currently furnish data to the major credit reporting companies. As a result, both BNPL and other lenders are unaware of the borrower’s current liabilities when making a decision to originate new loans,” Flicker says.

In light of these concerns, the CFPB is working on recommendations for U.S. lawmakers to consider. PYMNTS reports that new rules for BNPL could come by year’s end,  possibly with an emphasis on extending protection similar to the Truth in Lending Act (TILA) to BNPL consumers.

Flicker says, “The most significant impact will be on legacy BNPL approval rates. Regulation will force BNPL lenders to implement more stringent underwriting or to decrease spending limits. Because many of their customers have lower credit scores, often living paycheck to paycheck, you can expect approval rates to fall and order size to decrease, negatively impacting the ROI for the merchant investment in legacy BNPL.

What Will New Regulations Mean for Merchants?

BNPL has benefitted merchants with increased revenues by helping customers find ways to make bigger purchases in troubled economic times. Furthermore, they’re purchases that don’t put merchants at risk of chargebacks, but that may change when BNPL is regulated. But regulations also have the potential to protect businesses.

We see these changes as a big win, not only for consumers, but also for retailers who have seen their relationships with consumers eroding, with BNPL providers harvesting their shopper data for their own gain,” Flicker says. “The new regulations should also level the playing field between fintechs and traditional financial institutions and card networks, providing a better product for consumers and merchants while allowing for innovation in the category.”

For more information on BNPL, contact us.

Author

Tonida Vaka

Director, Strategic Partnerships and PPaaS Sales

Ingenico North America

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