Rapid Growth of Buy Now, Pay Later Market Raises Global Consumer Protection Concerns as CFPB Watch and Wait (For Now) Eversheds Sutherland (United States) LLP


The explosive growth of buy now, pay later (BNPL) products is a critical part of the fintech news cycle. The model, which gained popularity with the point-of-sale financing options offered by simple game providers like Affirm, Afterpay, and Klarna, quickly reproduced as card networks and big tech companies entered. on the market. Factors behind BNPL’s rise to power include an increase in online shopping during the pandemic, skepticism about the use of credit cards among younger segments of the population, and a decrease in the friction involved in online shopping. BNPL transactions because they are introduced earlier and more transparently into the transaction flow.

Here are some of the most important recent developments:

  1. Card networks launch BNPL platforms: The major card networks, as the dominant providers of consumer credit at the point of sale, strive to get BNPL transactions to the card rails. Last summer, Visa launched its Visa Installment Program, which converts existing credit lines of cardholders into a BNPL option displayed at the point of sale. Mastercard recently announced its partnership with several financial services companies to offer BNPL options instantly at checkout or view pre-approved BNPL options through mobile apps. The Mastercard platform will also be open to existing BNPL providers who wish to expand their reach.
  2. Major acquisitions. In a context of sustained investment and rising valuations, the months of August and September were marked by two highly publicized transactions in the BNPL space. Square announced on August 1 its intention to acquire Afterpay for $ 29 billion in an all-equity transaction expected to close in early 2022. On September 7, PayPal announced its cash acquisition of Japanese platform BNPL Paidy.
  3. Competition between Big Tech Players. Apple and Goldman Sachs have announced the launch of Apple Pay Later, a BNPL product that allows Apply Pay users to make purchases using funds borrowed from Goldman Sachs and make installment payments with any credit card. The recently announced partnership between Amazon and supplier BNPL Affirm incorporates the BNPL option into the checkout process for eligible Amazon customers for purchases of $ 50 or more. Affirm has also partnered with mega-retailers Walmart and Target.

Global consumer adoption of BNPL has caught the attention of financial regulators. The main concern, as with other consumer credit products, is whether BNPL is encouraging consumers to take on debt. This conversation focuses on two issues: affordability (underwriting) and transparency (disclosure). These are the same issues that frame the “debt cycle” debate in the United States, where small lenders have been criticized for exploiting cognitive biases and consumer vulnerabilities to make unaffordable loans. However, since BNPL products generally have straightforward redemption terms, regulators may be more likely to focus on affordability and impulse buying than on disclosure regarding BNPL.

Globally, consumer advocates, as well as financial regulators, are considering underwriting and affordability, especially compared to less experienced borrowers. In the US, UK and Australia, the transaction structure and periodic lack of interest in many BNPL products has allowed them at least partial exemption from major consumer credit protection laws. However, there are indications of increasing regulatory attention.

For example, the UK’s Financial Conduct Authority (FCA) recently published a request for public feedback on the BNPL market and the appropriate scope of the new BNPL regulations. In particular, the FCA is seeking comments on the potential for harm to consumers from various elements of BNPL’s business model. FCA’s stated goal is to develop “proportionate” regulations that protect consumers without stifling innovation or reducing consumer choice.
Just ahead of the FCA’s announcement, Klarna announced plans to change its UK product to include more robust credit checks (though optional), a ‘pay now’ option, and payment information meant to make it clear that the transaction is a loan and has a missed payment. penalties. The UK advertising regulator criticized Klarna last year for using social media posts to promote spending to improve mood.

Last March, the Australian Finance Industry Association, an industry group, also took steps to proactively address consumer protection concerns by issuing a BNPL “Code of Practice”. The Code attempts to address the affordability problem by requiring signatories to consider customer vulnerabilities in the underwriting process. Interestingly, these vulnerabilities include not only financial capacity, but other life circumstances, such as’ relationship breakdown ‘, domestic violence, and’ having different cultural assumptions or attitudes about life. ‘money”.

Citing concerns about excessive leverage, the Swedish national legislature amended the country’s Payment Services Act to prohibit payment service providers from presenting BNPL options over “direct payment” methods in the payment process. payment.

The CFPB, the main national regulator of non-banks in the United States, has not yet intervened directly in the BNPL market. On July 6, the CFPB published a blog post aimed at explaining BNPL and its risks to consumers. The post takes a slightly cautious tone, advising consumers to make sure they understand their finances and budget before using BNPL and explaining that some providers charge late fees or report missed payments to credit bureaus.
US industry watchers were generally encouraged by the neutral tone and the lack of strong disclaimers in the post. However, recent data on the redemption behavior and financial condition of BNPL clients, as well as the lack of strong underwriting by many providers, is attracting the attention of regulators globally. For example, a recent study published by Credit Karma indicates that a third of BNPL’s US clients have missed one or more payments.1 Of those customers, 72% said they thought the missed payments lowered their credit rating. These risks are heightened when consumers take out more than one BNPL transaction simultaneously – a behavior that neither regulators nor other BNPL providers can track as most BNPL transactions go unreported to credit bureaus. In addition, BNPL providers often base their credit decisions on “soft” credit draws and the customer’s repayment history with the provider rather than full credit reports and income levels.
The recent CFPB classification of revenue sharing agreements as “credit” within the meaning of the Truth-in-Lending Act (TILA), which we blanket in this newsletter, testifies to a new (or rediscovered) daring to bring emerging consumer credit products into the regulatory fold. CFPB’s consent order with Better Future Forward, an ISA provider, was based on the Bureau’s deception authority under the Dodd-Frank Act – a route that is less likely with traditional BNPL products given their simple and familiar structure. BNPL products that do not impose a finance charge and are payable in four installments or less are clearly excluded from TILA coverage. However, if there is sufficient evidence of the unaffordability and harm resulting to the consumer from using BNPL, the CFPB could use its flexible abuse authority to address these issues.

Subscription for repayment capability is now required by law with respect to credit cards and mortgages in the United States. The CFPB is sensitive to concerns about affordability and the debt cycle. In 2017, the agency used its power of abuse to propose a rule that would have required payday lenders to guarantee an applicant’s ability to repay the loan, as well as other credit obligations (including other payday loans). This provision of the rule was repealed by subsequent regulation in 2020. However, the Chopra-era CFPB is expected to resume this effort and, with enough data to back it up, could cast a wider net with a new rule that includes BNPL. This outcome would be more likely if data trends suggest that the use of BNPL is associated with negative impacts on the financial condition of consumers over time.

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