Regulatory Scrutiny of the Buy Now, Pay Later Industry

Since 2019, “buy now, pay later” (BNPL) loans have been a popular option among consumers and retailers alike. In the last few years, however, the BNPL industry has undergone explosive growth due, in large part, to increased online and in-app shopping during the COVID-19 pandemic. Alongside this growth has come significant scrutiny from federal and state regulators. With signs of a regulatory crackdown on the horizon, this Retail Did You Know? analyzes recent federal and state regulatory action concerning the BNPL market and summarizes the impacts this increased scrutiny of BNPL will likely have for retailers.

BACKGROUND ON BNPL

BNPL is a type of short-term financing option that allows consumers to make a retail purchase and pay off the balance in small installments, which offer no or low interest options if fully paid as agreed. BNPL loans are popular because they are a more accessible and more affordable alternative to traditional credit cards. The loans can be offered directly to consumers via fintechs before a purchase is made, or indirectly through a merchant that partners with a fintech or financial institution at the time of the consumer’s purchase.

FEDERAL REGULATORY ACTION

On September 15, 2022, the Consumer Financial Protection Bureau (CFPB) issued a report on the BNPL industry, expressing the view that BNPL has the potential to harm consumers and that it plans to regulate the industry commensurate with that risk. The CFPB identified the following three main categories of risks to consumers:

1. Discrete consumer harms: The CFPB found that BNPL products are often structured in a way that create operational hurdles, lack standardized disclosures, and impose burdensome and confusing dispute resolution rights.
2. Data harvesting: The CFPB concluded that BNPL providers often collect consumer data—and model their products based on that data—to increase the likelihood of sales from buyers, which can compromise consumer privacy and autonomy.
3. Overextension: The CFPB’s analysis found that the BNPL industry encourages consumer overextension, which can contribute to loan stacking, sustained usage, and can negatively affect consumers’ abilities to meet their loan obligations. In a follow-up report issued by the CFPB on March 3, 2023, it further analyzed consumer lending in the context of BNPL. The CFPB found that while BNPL borrowers did not have “noticeable indications of financial stress,” they were more likely to be highly indebted, revolve on their credit cards, and have delinquencies in traditional credit products.

Based on these risks, the CFPB has pledged to take several steps to regulate the BNPL market in the near future. Among those steps, the CFPB promised to develop “interpretive guidance or rules” to ensure that BNPL providers are subject to similar baseline protections Congress has already established for credit card companies. The CFPB also promised that BNPL providers would be subject to supervisory examination, whether through self-identification of BNPL providers to the CFPB, or on a compulsory basis.

STATE REGULATORY ACTION

The CFPB is not the only regulatory agency turning its attention to the BNPL industry. At the state level, California is leading the way, having already incorporated BNPL products under its California Financing Law (CFL). Since 2020, California regulators have made it clear that all BNPL plans are considered “loans” under the CFL, and therefore BNPL providers must have a license in order to issue them. With these licenses, BNPL providers are subject to rules and regulations regarding how BNPL loans can be marketed, how much interest can be charged, and how debts can be collected from consumers.

Other states are taking a cue from California and examining their own regulations (or lack thereof) of the BNPL market. For instance, in Massachusetts, small loan companies and retail installment finance companies must have a state license to operate, and regulators have yet to say whether all BNPL providers—big or small—will likewise be required to obtain a license. In Oregon, regulators have said that they are working with several other states to monitor the BNPL industry and consider action, including the potential creation of BNPL-specific state statutes, which would provide regulatory oversight of BNPL products.

IMPLICATIONS FOR RETAILERS

Notwithstanding scrutiny of the BNPL industry, these products remain increasingly popular among consumers and retailers, and for good reason. Consumers can make retail purchases with the peace of mind that they will be able to pay them off over time, interest free, and retailers can leverage BNPL to increase revenue, brand awareness, and their customer base.

Regulation of the industry should not stop retailers from using BNPL to maximize business, but retailers should implement careful monitoring and review protocols to ensure that they are up to date and remain compliant with any preexisting and yet-to-come BNPL laws. It is particularly important to pay attention to these issues when entering into arrangements with BNPL providers, especially given how fast the legal landscape is changing in this area.

HOW WE CAN HELP

Morgan Lewis has experience advising retailers on federal and state regulations impacting business and ecommerce and ensuring that their practices comply with these constantly evolving regulations, including in the BNPL space.