Regulate Now, Pay Later

The pandemic has lent momentum to a number of trends in digital payments, but one of the biggest is the buy now, pay later option. The installment plan isn’t new, but providers have offered it as a way of giving merchants another payment channel as Covid-wary consumers crowded online.

With BNPL, you get to pay off your purchase with, typically, four interest-free installments over six weeks. You get to buy what you want while avoiding high-interest-rate credit cards, and merchants clinch a sale they might have otherwise lost. No muss, no fuss, right?

Except regulators are starting to make a fuss. Last month, the other shoe dropped with a letter sent to five leading BNPL firms from the Consumer Financial Protection Bureau requesting information on their services. The five—Affirm Inc., Afterpay Ltd., Klarna AB, PayPal Holdings Inc., and Zip Co.—have until March 1 to respond to the order. By that time, Afterpay will likely have become part of Block Inc. (formerly Square Inc.) in a $29-billion deal the parties clinched in August.

The bureau is demanding data related to several areas. The first concerns the potential for overspending by consumers who may rely too heavily on the readily accessible point-of-sale credit offered by the BNPL apps. “[P]eople can quickly become regular users of BNPL for everyday discretionary buying, especially if they download the easy-to-use apps or install the web browser plugins,” the regulator’s letter notes.

Other concerns include the potential for BNPL credit to fall outside of consumer-protection rules that apply to other lending products. That could mean lenders might collect and use data gathered from consumers’ BNPL transactions in ways not allowed for credit card and other credit transactions, according to the CFPB.

Shortly before the order went out, six U.S. Senators sent a letter to Rohit Chopra, the CFPB’s director, asking for a review of BNPL products with a view toward introducing consumer protections. All six Senators are Democratic members of the Committee on Banking, Housing, and Urban Affairs.

It shouldn’t surprise anyone that BNPL has landed on regulators’ radar screens. It has been around for years in various forms, but its recent popularity has made it what Eric Grover, principal at the Minden, Nev.-based payments consultancy Intrepid Ventures, calls “an irresistible target.”

Indeed, Ben Jackson, our Payments 3.0 columnist and chief operating officer at the Innovative Payments Association, cites the CFPB probe as a warning to fintechs that tougher oversight is coming, and fast.

But oversight, too, comes with a cost. The new BNPL rules, when final, may well introduce constraints that could make the programs less popular with merchants and less accessible to consumers.

—John Stewart, Editor, john@digitaltransactions.net