The agency’s regulatory inquiry will level the playing field in the long run
The US is notorious lagging behind progressive regulation for fintechs, which is alarming given the number of US citizens in serious debt. As of the third quarter of 2021, U.S. citizens owed more than $15 trillion, nearly the highest level in the country’s history.
Buy now, pay later (BNPL) services provide customers with accessibility and flexibility for payments, but unregulated services can inadvertently endanger people’s financial health. Some BNPL providers penalize consumers up to 25% of their purchase for late refunds. And a Credit Karma survey showed that 72% of consumers in the US experienced lower credit scores after using unregulated BNPL services.
The proliferation of smaller BNPL providers that fail to follow responsible lending best practices will slow down due to new regulatory barriers.
But the right set of regulations will solve this problem and ultimately give banks the opportunity to enter the BNPL arena and become leaders.
The Consumer Financial Protection Bureau (CFPB) keeps a close eye on consumer credit products. A survey announced in December 2021 asked major players Affirm, Afterpay, Klarna, PayPal and Zip to provide insights into the risks and benefits of their products.
While BNPL players have positioned themselves as the driving force behind financial inclusion, policymakers will find that many of these providers need to make far greater strides in customer financial well-being. Regulation is the way to ensure that.
While regulators will take some time to come to conclusions and implement real hard rules, the consequences will be immediate.
This is what we expect:
The journey to fair and responsible lending
With the right regulations, it will soon become apparent that fair and responsible lending goes hand in hand with accessible and affordable consumer finance.
The CFPB rules probe will level the playing field in the long run. Fintechs have demonstrated the need for BNPL and have proven it is possible to scale this offering across both in-store channels and e-commerce sites. However, traditional lenders and banks, already offering services that adhere to reporting protocols, can now also thrive in the BNPL space with the right technology partnerships.
By partnering with a BNPL provider, banks can deploy flexible, responsible BNPL solutions that benefit both merchants and consumers. By offering white-label BNPL options from banks, merchants can increase sales and average order value (AOV). Consumers will benefit from the high adoption rate of banks and other regulated financial institutions. In addition, leading banks and lenders often offer the most competitive loan programs.
What is the most viable way to regulate the BNPL industry?
Let’s analyze which countries are on the right track. The UK was one of the first in terms of regulation. But despite the Woolard Review published by the UK’s Financial Conduct Authority (FCA) in early 2021, which explained the urgency to regulate the BNPL industry, no new regulatory regime that would bring unregulated BNPL products under the FCA is expected before 2023.