Buy now, pay later (BNPL) solutions are under intense regulatory scrutiny in the U.S. by the Consumer Financial Protection Bureau (CFPB), but new regulation may be a win-win situation for consumers, BNLP providers and merchants, Chuck Bell, programs director at Consumer Reports told PYMNTS on the future regulatory landscape in this space.
“For many consumers, [BNPL] is a great payment method, but sometimes the loans have unexpected features and there are problems that consumers are running into; our point of view is that all types of service loans should be subject to financial regulation,” Bell said in an interview.
The main concerns for Bell are the lack of standardized disclosure requirements and the ability for consumers to repay the loans. When consumers agree to accept loans to buy an iPad or a smartphone, it is not always easy for them to find the key terms such as the interest rate and the fees and whether there is a hard or soft credit check, explains Bell. New regulation mandating standardized disclosure and a format designed so that people could quickly compare products and understand the type of loan they are getting into would be very beneficial for consumers.
A standardized disclosure would also help to address the second concern: the ability for consumers to repay. Not all BNPL products are the same — some of them have zero interest pay in four payments, but some others are interest-bearing loans, and consumers are not always aware of the differences. Besides, “consumers are stacking up multiple loans, as many as 16 BNPL loans per month, and they could run into obstacles of just understanding the terms of repayments,” said Bell.
These are problems that the regulator is looking at, and according to Bell, there is a significant possibility that the CFPB will take action, in particular around the ability to repay. The CFPB has a long history of wanting to promote informed use of financial services, but also to make sure that products are safe and suitable for their intended purpose. Education is important — people should know more about BNPL solutions — but to the extent that there’s an issue with the ability to repay, the regulator may take further action, for instance on credit checks or reporting requirements, Bell suggests.
Another possibility is to extend the protections offered by the Truth in Lending Act (TILA) to BNPL products. TILA, which covers some forms of credit like credit cards, requires companies subject to it to disclose fees and rates, and to have in place some mechanism for dispute settlement, among other things. “I think that [extent TILA protections] would make sense because it is a form of credit; when BNPL providers first opened their doors, they were saying to us, no, we are just a paying service, not a form of credit. Some of us were skeptical because this has a lot of the same issues as other types of open-ended credits such as credit cards or consumer loans.”
But new regulation wouldn’t be necessarily a bad thing for BNPL providers and merchants either. “I think it can be a win-win to have good solid rules down the road,” said Bell. Merchants are selling more with this payment method; they are even willing to pay higher merchant fees because consumers really want to use BNPL. As the industry matures, there will be more pressure on the fees paid by the retailers, and this can encourage competition among BNPL providers. The BNPL industry is still evolving, and new products are coming to the market with different rates and rules. New regulation imposing standardized disclosure on BNPL providers would help consumers to navigate all these changes.
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