In the United States, “Buy Now, Pay Later” (BNPL) solutions are under intense regulatory scrutiny by the Consumer Financial Protection Bureau (CFPB), but new regulation could be a win-win situation for consumers, suppliers and merchants at BNLP, Chuck Bell, director of programs at Consumer Reports told PYMNTS about the future regulatory landscape in this space.
“For many consumers, [BNPL] is a great payment method, but sometimes loans have unexpected features and consumers run into problems; our view is that all types of service loans should be subject to financial regulation,” Bell said in an interview.
Bell’s main concerns are the lack of standardized disclosure requirements and the ability of consumers to repay loans. When consumers agree to accept loans to purchase an iPad or smartphone, it is not always easy for them to find key terms such as interest rate and fees and whether there is verification of hard or soft credit,” explains Bell. New regulations requiring standardized disclosure and a format designed for people to quickly compare products and understand the type of loan they are getting into would greatly benefit consumers.
Standardized disclosure would also help address the second concern: consumers’ ability to repay. Not all BNPL products are the same – some of them are interest-free to pay in four installments, but others are interest-bearing loans, and consumers are not always aware of the differences. In addition, “consumers are accumulating multiple loans, up to 16 BNPL loans per month, and they could run into barriers related to simply understanding repayment terms,” Bell said.
These are issues the regulator is looking at, and Bell says there is significant potential for the CFPB to act, particularly around repayment capacity. The CFPB has long wanted to promote informed use of financial services, but also to ensure that products are safe and suitable for their intended use. Education is important – people should know more about BNPL solutions – but to the extent that there is an issue with repayment capacity, the regulator may take further action, for example on credit checks or reporting requirements, suggests Bell.
Another possibility is to extend the protections offered by the Truth in Lending Act (TILA) to BNPL products. TILA, which covers certain forms of credit like credit cards, requires companies subject to it to disclose fees and rates, and to set up a dispute resolution mechanism, among other things. “I think that [extent TILA protections] would make sense because it is a form of credit; when the BNPL suppliers opened their doors, they were telling us, no, we are just a paid service, not a form of credit. Some of us were skeptical because it has many of the same issues as other types of open-ended credit such as credit cards or consumer loans.
But new regulations wouldn’t necessarily be a bad thing for BNPL’s suppliers and traders either. “I think it can be a win-win to have good, solid rules on the road,” Bell said. Merchants sell more with this payment method; they are even willing to pay higher merchant fees because consumers really want to use BNPL. As the industry matures, there will be more pressure on fees paid by retailers, which may encourage competition among BNPL suppliers. The BNPL industry is always changing and new products are coming to market with different rates and rules. New regulations mandating standardized disclosure for BNPL providers would help consumers navigate all of these changes.
Read also: The CFPB and the BNPL: 3 things to watch out for