The U.S. is notoriously behind on forward-thinking regulation for fintechs, which is unsettling considering the number of U.S. citizens in serious debt. As of the third quarter of 2021, American citizens owed more than $15 trillion, nearing the highest level in the nation’s history.
Buy now, pay later (BNPL) services offer customers accessibility and flexibility for payments, but unregulated services mean people can unintentionally put their financial health at risk. Some BNPL providers penalize consumers up to 25% of their purchase for repaying late. And a Credit Karma study showed 72% of consumers in the U.S. ended up with lower credit scores after using unregulated BNPL services.
The proliferation of smaller BNPL providers that don’t follow responsible lending best practices will slow down due to new regulatory barriers.
But the right set of regulations will resolve this issue and ultimately provide an opportunity for banks to enter and become leaders in the BNPL arena.
The Consumer Financial Protection Bureau (CFPB) is keeping a close eye on consumer credit products. A probe announced in December 2021 asked major players Affirm, Afterpay, Klarna, PayPal, and Zip to provide insight into the risks and benefits of their products.
While BNPL players have positioned themselves as the driving force for financial inclusion, policymakers will discover that many of these providers need to make far more progress regarding customers’ financial well-being. Regulation is the way to ensure that.
Although regulators will take some time to reach conclusions and implement real hardline requirements, the ramifications will be immediate.
Here’s what we expect:
The journey to fair and responsible lending
The right set of regulations will soon show that fair and responsible lending goes hand-in-hand with accessible and affordable consumer financing.
The CFPB regulation probe will level the playing field in the long term. Fintechs have shown there is a need for BNPL, and have proven that it is possible to scale these offerings throughout both in-store channels and e-commerce sites. However, traditional lenders and banks, which already offer services that adhere to reporting protocols, can now also flourish in the BNPL space with the right technological partnerships.
By partnering with a BNPL provider, banks can deploy agile, responsible BNPL solutions that will benefit both merchants and consumers. By offering white-labeled BNPL options from banks, merchants could increase sales and average order value (AOV). Consumers will benefit from high acceptance rates provided by banks and other regulated financial institutions. Plus, leading banks and lenders often offer the most competitive loan programs.
What’s the most viable way to regulate the BNPL industry?
Let’s analyze which countries are on the right track. The U.K. was one of the first movers regarding regulation. But despite the Woolard Review published by the U.K.'s Financial Conduct Authority (FCA) in early 2021, which explained the urgency to regulate the BNPL industry, there is no new regulatory regime expected to bring unregulated BNPL products under the FCA before 2023.