Buy Now Pay Later Regulation is Coming: 5 Steps to Get Ahead

As growth and popularity of Buy Now Pay Later (BNPL) loans continue to rise, so too does regulatory scrutiny. These are the hot button areas you should watch and the actions you should take to prepare for regulatory oversight.

A study from EMARKETER predicted that 93.3 million US consumers will use BNPL services in 2024. The same study showed that the total U.S. BNPL spending will grow 12.3% YoY to $80.77 billion in 2024 and leap to $97.25 billion in 2025. The rapid growth in this product area will lead to regulatory changes and enforcement. Lenders should start preparing now for buy now pay later regulation.

Regulators Play Catchup to Understand BNPL’s Risk for Consumer Harm

Financially fragile households tend to seek out financing through BNPL because the underwriting criteria tends to be less requiring than traditional loans. The most common profiles for those who want to take advantage of this type of loan often have higher levels of debt, have more delinquencies on traditional credit products and use their bank’s overdraft services. The growth, popularity and product diversity on BNPL loans has caught the attention of regulators and while BNPL loans have lacked federal oversight, a recent interpretive rule might change that in the future.

The CFPB completed a year-long investigation in 2022 and they released a report outlining potential risks the BNPL loans can have on consumers. Specifically, the investigation by the CFPB underscored concerns about:

• Inconsistent consumer protections: Borrowers of BNPL products currently lack common consumer protections, such as dispute resolution rights or standardized and clear credit disclosures that could drive consumer harm.
• Data harvesting and monetization: BNPL platforms are rapidly building a strong presence. They leverage data to create digital profiles based on borrowing patterns and behaviors. However, these data collection practices raise concerns about compromising consumer privacy and the potential for market dominance by a few large tech platform providers.
• Debt accumulation and overextension: BNPL lenders often lack visibility into a borrower’s existing liabilities. Since most BNPL lenders do not report to the CRAs, there’s a risk of loan stacking, which increases the chances of consumer default.

The CFPB’s Interpretive Rule Changes the Playing Field

In spring of 2024, the CFPB issued an interpretive rule for BNPL loans. The rule classifies certain BNPL providers as “card issuers” and their digital accounts as “credit cards” under TILA and Regulation Z. This is a game changer. The classification change is significant and specifically targets the popular “pay in four” installment product and introduces the following requirements:

• Investigation of disputes: Card issuers must investigate disputes and pause repayments during investigations. The CFPB notes that in its view, BNPL providers have not consistently processed disputes in the same manner as card issuers but now they must.
• Provision of refunds: Similar to disputes, the CFPB asserts that BNPL providers did not always provide refunds or did not do so on a timely basis. These providers now must adhere to Sub-part B’s rules on application of refunds to consumers’ accounts.
• Periodic statements: Like other card issuers, BNPL providers must now provide periodic statements.

5 Proactive Steps to Take for the CFPB’s Buy Now Pay Later Regulation

This interpretive CFPB rule will take effect 60 days after it is published in the Federal Register, which should happen sometime later this summer. Below are suggested steps Bridgeforce recommends for BNPL lenders to stay ahead of ongoing regulatory pressure and oversight:

1. Comprehensive Risk Assessment:  Conduct thorough risk assessments as a credit card issuer would, to identify potential compliance gaps and vulnerabilities within the business operations. This includes assessing risks related to things such as consumer protection, data privacy and fraud prevention.

2. Enhanced Consumer Protections:  Implement robust consumer protection measures to ensure transparency, fairness, and responsible lending practices. These practices may involve providing clear and easily understandable terms and conditions, offering flexible repayment options, and providing adequate support for customers experiencing financial difficulties. Make sure you have a robust complaint monitoring and handling process to watch how customers respond to your efforts.

3. Regulatory Compliance Framework:  Develop and maintain a comprehensive regulatory compliance framework that aligns with relevant laws and regulations governing BNPL services, including those regulations yet to become law. This involves establishing internal policies, procedures, and controls to ensure adherence to regulatory requirements. If the CFPB showed up on your doorstep, what would you show them to demonstrate a sound regulatory framework?

4. 3rd Party Oversight:  Third-party risk management is also an area of concern for the OCC. Banks that partner with third parties, including merchants, are expected to have effective third-party risk management practices.

5. Stay Informed:  Keep track of regulatory developments and industry changes in the financial services sector. Provide ongoing training and education to employees to enhance their understanding of regulatory obligations, fostering a culture of compliance within your organization.

Navigate Buy Now Pay Later Regulation Requirements with Bridgeforce

By taking proactive measures, BNPL lenders can position themselves to successfully navigate regulatory scrutiny while enhancing trust and credibility with their consumers. Bridgeforce works with financial institutions across the industry to prepare them for regulatory oversight. Contact us to help you be ready for future BNPL-related regulatory and compliance changes.