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:
- 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.
- 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.
- 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 key consumer credit protection laws. However, there are indications of increasing regulatory attention.
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 forcing 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.
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 consumers’ financial situation over time.