How The CFPB Can Promote A Safe & Competitive BNPL Marketplace

This Friday, the Consumer Financial Protection Bureau (CFPB) will receive input from stakeholders in response to its December Request For Information (RFI) on the business practices of leading fintech companies offering “buy now, pay later” (BNPL) credit. Here’s what’s happening, why it matters, what they’re saying and how the CFPB can help promote a safe and competitive BNPL marketplace.   

What’s Happening

BNPL has taken the nation by storm, but the ease and convenience afforded by the product has also raised legitimate questions of whether users are receiving the high level of protection they deserve from under-regulated fintechs, who control a majority of the market, but do not abide by the same federal oversight as America’s leading banks

Recognizing the explosive growth of BNPL and the risks presented by under-regulated fintech providers, the CFPB in December opened an inquiry into the business practices of five leading fintech issuers – Affirm, Afterpay, Klarna, PayPal, and Zip. Specifically, the Bureau highlighted debt accumulation, regulatory arbitrage, and data harvesting as three areas of concern and the impetus for initiating this inquiry. Upon review of this information and in consideration of stakeholder input, the Bureau will then release its findings and determine whether further regulatory action is needed in this nascent market

Why It Matters

The number of Americans using BNPL products has climbed 300% every year since 2018 and that figure is expected to rise even further as more merchants unveil BNPL as a financing option at checkout. Despite being touted by some as a driver towards financial inclusion, fintech BNPL products may actually encourage users to unknowingly take on more debt than they realize, while also subjecting them to greater risk of fraud and abuse

As opposed to traditional banks, fintechs lack federal oversight and may not take into account an applicant’s credit history and ability to repay in their approval processes. This may be contributing to some of the repayment behavioral trends seen over the last year that have caught the eye of regulators and legislators, alike.  

What They’re Saying

Although the Bureau may not immediately release its conclusions, increased scrutiny of fintech BNPL issuers and the threat of additional regulatory requirements will undoubtedly yield changes to the market. Here’s what consumer advocates and news outlets are saying on why the Bureau should take action and what to expect following the release of its findings: 

“Unaffordable credit may provide a quick inflow of cash, but over the longer term — which, in the case of BNPL, can be just a few weeks or months down the road — unregulated fintech products can add to the debt burden of consumers already overextended by debt. […] the time for regulators to rein in BNPL is now.”

“Even without additional federal regulation, the digital-payments industry should expect increased scrutiny and oversight. […] Whether this inquiry leads to enforcement, it sends a strong signal to all fintech firms and retail partners that regulators are questioning the degree to which consumers could face risk.”

“Traditional banks that are regulated won’t only survive, they’ll thrive. Why? As regulators crack down on BNPL providers, banks, who have been conforming to regulation for years, will strengthen their position in the market.”

“Regulation will raise the barriers to entry, closing the doors to smaller BNPL providers. While the big fintechs won’t be shut out of the market, the industry will have greater barriers to entry. With less competition in the market, there will be more opportunities for banks to succeed.”

How The CFPB Can Promote A Safe & Competitive BNPL Marketplace 

The Bureau’s RFI on the business practices of leading fintech BNPL providers was an important first step towards instituting a level regulatory playing field in the BNPL marketplace. To further protect all BNPL users, CBA has advocated for the Bureau to also consider the following recommendations to further our shared objective of ensuring hardworking families may safely benefit from this financial innovation today, and for years to come

Creditworthiness

Ensuring non-bank fintech providers are applying appropriate creditworthiness analysis will help strengthen the financial health of consumers and mitigate their potential for accumulating unwanted and unsustainable debt.

Disclosures

Although BNPL products fall outside the Truth in Lending Act, BNPL providers should provide a standardized, simple disclosure to ensure consumers are adequately informed of the terms of the products they are using.

Data Protection

The Bureau should examine whether fintechs are complying with pre-existing rules and procedures aimed at protecting the sensitive financial data of its customers.

The Bottom Line

As more Americans choose BNPL financing as a credit alternative, all consumers deserve the certainty of knowing they are receiving the highest level of protections, whether they choose a product issued by a fintech or a traditional bank. To achieve this, policymakers must institute a level regulatory playing field in the BNPL marketplace. Doing so will help ensure consumers can safely benefit from the features of this transformational banking innovation.

CBA Advocacy

To learn more about the rapid growth of BNPL and the threat posed to consumers from under-regulated fintech providers, click HERE.

To read about why momentum is building for instituting a level regulatory playing field in the BNPL marketplace, click HERE

To read CBA’s January op-ed “Consumer protections should apply to buy now/pay later firms, too,” click HERE.