By Patti Murphy
ProScribes Inc.
The UK government is bucking to become the first to regulate buy now, pay later (BNPL) companies, those financial technology firms that have been trying to siphon off credit and debit card payments at the POS.
Meanwhile, here in the United States, the Consumer Financial Protection Bureau has decided on a wait-and-see approach to regulating BNPL.
In the UK, the Treasury Ministry drafted legislation that would require registration of BNPL firms with the Financial Conduct Authority, a non-governmental body that regulates financial services firms. It also sets forth requirements, such as the performance of affordability checks to determine whether a consumer has the means to repay the money. Also, the legislation calls for advertisements for BNPL to be fair, clear and not misleading. And the legislation provides for a consumer complaint mechanism.
The UK government has been working up a BNPL regulatory scheme for about two years and published a "consultation" paper last summer indicating how regulation might play out. In the meantime, the FCA has assumed a get-tough approach to supervising BNPL firms already, taking many to task for promotions deemed unclear, unfair and/or misleading.
Plans are for a two-year transition period once the legislation is approved. During that time, companies already offering BNPL in the UK will receive temporary permissions to continue. "The government is ambitious that the legislation for the regulation of BNPL products will be laid before Parliament during 2023," the international law firm Sidley Austin stated in a blog post.
Australia is also looking into BNPL. In November 2022, the Australian government outlined three options to "close the regulation gap" on BNPL. It is considering stronger industry self-regulation, as well as some type of government regulation that mirrors rules the credit card companies operate under.
BNPL has been around, in one form or another, for generations. I recall as a child my mother would make purchases over time, receiving the item once all payments were received. BNPL is like those layaway plans, only the purchaser gets to take the item home from the get-go, covering the cost with weekly or bi-weekly payments over a predetermined period, commonly 30-days.
Consumers pay no interest for BNPL, provided the purchase is paid off over the agreed to period of time. Merchants pay anywhere from 4 percent to 8 percent to BNPL companies, far and above even the highest interchange rates. Yet, they complain about interchange. Hmm.
The five largest providers of BNPL loans—Affirm, Afterpay, Klarna, PayPal and Zip—combined originated 180 million BNPL transactions worth $24.2 billion in 2021, according to the Consumer Financial Protection Bureau. Researchers at Research and Markets estimate that the global BNPL market is growing at a compound annual rate of 28 percent.
If that's the case, Americans can be expected to rack up nearly $40 billion in BNPL transactions this year, equal to a successful merchant card portfolio, but a drop in the multi-trillion dollar bucket that is credit and debit card payments.
Consumer Reports found that in the first seven months of 2022 the number of Americans using BNPL at least once had jumped from 18 percent to 28 percent.
"A common misperception of buy now, pay later borrowers is that they lack access to other forms of credit," said CFPB Director Rohit Chopra. Not so. A report released earlier this month by the consumer watchdog agency reveals how BNPL customers are heavy users of credit, especially high-interest credit, like payday loans and pawn loans.
Some experts have expressed concerns that some consumers are racking up too much debt with BNPL. Consumer Reports reported that 10 percent of borrowers were paying off four or more BNPL purchases; 18 percent of those reported missing at least one scheduled payment.
A CFPB analysis found charge-offs of BNPL loans jumped to 3.8 percent in 2021, from 2.9 percent the year before. During that same period, credit card charge-off rates for the 100 largest banks fell from 3.59 percent to 1.56 percent, according to the Federal Reserve Board.
The latest report from the CFPB on this topic revealed that BNPL customers tend to exhibit higher levels of financial distress, and that they typically are more highly indebted, have higher credit card balances and often miss credit card payments. They also are more likely to have borrowed using products like payday loans and tend to have low credit scores.
"Since Buy Now, Pay Later is like other forms of credit, we are working to ensure that borrowers have similar protections and that companies play by similar rules," Chopra said in releasing the report.
But here is the curious thing: the CFPB doesn't seem to think BNPL is necessarily to blame for the over-indebtedness of consumers who use the product.
"The report finds that many of these differences [in indebtedness] pre-date Buy Now, Pay Later use and highlights the need for further research into whether the products have any causal impact on consumer indebtedness," CFPB said in a press release.
The Federal Trade Commission made clear its position on BNPL and the merchants that offer it, namely that they had better toe the line with regards to the FTC Act, the legislation that created the FTC. It empowers the agency to prevent unfair competition and deceptive acts and practices involving commerce, and to take corrective steps against companies that don't play fair.
Most of the BNPL activity, to date, has been in the ecommerce sphere. Providers have struggled to bring the service to the physical POS because of the friction involved—a multi-step process of registering and applying for funding, or logging into a third-party service or app.
The payments technology firm Ingenico said it has figured out a way to eliminate these barriers. It disclosed last month that it is working with BNPL provider Splitit to bring one-touch BNPL capabilities to the physical POS. Unlike legacy BNPL services that originate new loans, the two companies have figured out a way to leverage existing credit card balances to offer zero percent interest installments.
"Splitit's Installments-as-a-Service platform is a new way to drive BNPL through a white-label, merchant-branded experience embedded within a brand's existing checkout flow," the companies said in a statement. 
Patti Murphy is senior editor at the Green Sheet and self-described payments maven of the fourth estate. She also co-hosts the Merchant Sales Podcast.
The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.
Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.
Prev Next
