Will US Regulators Crack Down on the Buy Now, Pay Later Industry?

Buy now, pay later (BNPL) models have surged in popularity during the pandemic as an explosion of ecommerce has led to more demand for alternative payment options, especially among young people. That growth has sparked a flurry of recent deals among retail and payments companies, including Square's $29 billion acquisition of BNPL provider Afterpay and Amazon's exclusive partnership with Affirm. But data shows that more people are missing installment payments and racking up late fees despite BNPL's promises of limited debt risk, and analysts and experts say it's only a matter of time before the fast-growing industry attracts the attention of U.S. regulators. "I can't imagine that this is going to escape at least scrutiny," said Aaron Press, a payments analyst at market intelligence firm IDC. "Whether or not it turns into actual regulation or legislation or not is anyone's guess." While Amazon Remains the Ecommerce Leader, It Could Be Set for Disruption The Consumer Financial Protection Bureau (CFPB) put out an advisory note in July that offered Americans a guide to what BNPL is and how to avoid falling into debt traps. However, the agency did not offer any judgment on whether consumers should use the products. Meanwhile, regulators in the United Kingdom have already imposed new rules on BNPL companies this year, and Australia is facing growing pressure to follow suit. Consumer debt risks Originally popular in Asia, BNPL models are designed to help consumers divide payments for bigger ticket purchases into monthly installments. Because they charge little to no interest, they are often billed as a safer financial product than credit cards. But surveys shows consumers can still find themselves in trouble with the late fees charged in BNPL providers, especially as young consumers use it for a growing number of purchases. Data released by Credit Karma and research firm Qualtrics this month found about 34% of people who've used BNPL products have fallen behind on payments, and 72% of those consumers believed their credit scores had taken a hit as a result. Colleen McCreary, consumer financial advocate at Credit Karma, said one dangerous thing for consumers about these products is that missed or late payments will negatively affect credit scores—while on-time payments do nothing to boost them. Missed or late payments will negatively affect credit scores—while on-time payments do nothing to boost them. While the number of BNPL customers who have missed payment deadlines ticked slightly downward in the most recent survey as compared to one conducted in February (38% versus 34%), McCreary said the change was not enough to say for sure whether consumers are becoming more savvy about the risks of these products. She's seen a "tale of two cities" narrative play out during the pandemic, where some consumers have done well at pulling out of debt and building savings while others have had a much more difficult time. Financial products like BNPL can make it even more difficult for people to weigh financial decisions, McCreary said. "I'm not quite sure that consumers really know what they're getting into," she added. "It just confuses the water to some extent." McCreary said Credit Karma fully expects agencies like the CFPB will investigate BNPL products soon. "Our hypothesis in this case is that regulators are going to start looking into it," McCreary said. "Just because from the CFPB perspective, I think that they're going to want to know, 'What's happening with these tools? What are the effects on consumers, and are they as advertised?'—which is generally what both the [Federal Trade Commission] and the CFPB seem to be caring about." Fueled by the Pandemic, Buy Now, Pay Later Is Reaching an Inflection Point Alternative models Gary Stein, who worked for the CFPB for nine years before joining Australian financial tech startup Openpay in January, thinks U.S. regulators like his former agency are already examining the consumer risks and benefits of BNPL models. They are likely taking into account how much BNPL firms rely on revenue collected through late fees, and whether these products are advertised fairly and transparently. "When a product takes off that quickly, and regulators look at it and see things like 'no cost' and yet a lot of revenues being derived from late fees, fast growth and that dynamic are going to attract a lot of attention," Stein said. That said, Stein thinks regulators will recognize there is a lot of demand for a consumer financial product that serves a market somewhere between credit cards and upfront payments, and that such a product can be beneficial to consumers as long as it doesn't slip into predatory territory. "There's no reason to throw a baby out with the bathwater," Stein said. "There may be some places to ensure more consistent transparency and other aspects to this product. But it's not like this is a broken model and it's gonna die." Openpay—and its newer U.S. counterpart Opy—has differentiated itself in the BNPL market by focusing on big-ticket costs specifically in the home improvement, education, auto repair and healthcare categories. Unlike other BNPL companies, it also runs traditional credit checks and caters to more financially mature customers. "I even hesitate a little to use the words 'buy now, pay later,'" Stein said. "We think of it as kind of a next evolution." Defining parameters That hesitation speaks to some of the challenges regulators might have if they attempt to install more guardrails on the BNPL space. The designation encompasses a variety of models that each come with their own installment and late fee schemes. "One of the biggest challenges is just deciding what is a BNPL offering versus what is a loan versus any number of things," said IDC's Press. "In some cases, these things look like traditional point-of-sale credit; in some cases, they look like payday loans. And so defining the parameters is going to be really important in understanding what exactly they're regulating." In some ways, BNPL providers already slip through loopholes in existing regulation. Because most of the companies do not charge interest, they are not subject to credit card laws, which can vary from state to state in the U.S. Press said if regulators do decide to impose new restrictions on BNPL, they will have to examine whether to do so by expanding existing laws or creating new rules. Retailer risk While a hypothetical regulatory battle over BNPL products could potentially hurt the brands of retailers who associate with these services in the eyes of consumers, Gartner ecommerce analyst Ant Duffin said most of the reputation risk will ultimately be borne by the services themselves. In terms of actual financial liability, BNPL services are designed especially to offload risk from retailers to BNPL providers. While BNPL companies have been rushing to lock down exclusive deals with merchants, Press said the services are interchangeable enough that it would be easy for retailers to switch to other companies should one of them take a hit from potential regulation. "I don't see it being a huge risk to get to the retailers," Press said. "To be honest, there's a lot of these BNPLs that have done such a great job developing their APIs and integrations that the challenge of switching is relatively small. So, if one of them were to run afoul of regulators, then switching to another one wouldn't be a huge lift." Buy Now, Pay Later Platform Afterpay Introduces In-App Ads to Let Brands Spotlight Deals