Buy Now, Pay Later? What Regulating Payments Could Look Like
As the nomination of Rohit Chopra to lead the Consumer Financial Protection Bureau (CFBP) wends its way through the confirmation process, the choice of Chopra — a known consumer advocate and current commissioner of the Federal Trade Commission (FTC) — has many speculating about what its approach to regulation will look like.
One area where we're likely to see greater regulatory oversight is around the rapidly growing area of buy now, pay later (BNPL) payment services that are popping up in checkout pages across the web.
BNPL services offer short-term lines of credit to consumers at the point of sale, often carrying little to no interest payments. While similar to the layaway of bygone days, with BNPL consumers can receive their purchases while continuing to pay off the balance over a number of installments. The model is particularly attractive to Americans in their 20s, less than half of whom have traditional credit cards.
FIS predicts that BNPL usage could grow 33 percent annually over the next four years. That kind of astronomical growth cannot fail to shine a greater spotlight on the need for a clear regulatory framework to protect consumers. After the U.K.’s financial services regulator recently called for new regulations around BNPL services, the U.S. likely is not far behind.
While it’s still early days for this new breed of short-term credit services, it would behoove the industry to come together to determine how to offer them in a manner that benefits everyone.
Evolution Into an Industry Trade Group
In lieu of broader guidance or regulation from states or national governments, the industry can take the first steps by forming a new BNPL trade group and creating best practices and guides for businesses that offer BNPL at the point of sale.
For example, the nation’ largest payments trade group, the Electronic Transaction Association (ETA), has published guidelines for payment facilitators as well as underwriting guidelines for payments technology companies to help them maintain strong and modern risk management programs. The ETA’s Payment Facilitator Guidelines provide a framework for properly incorporating risk and compliance controls into the payment aggregator business model.
It's likely in the best interest of BNPL companies to come together to develop a broad set of agreed-upon definitions and standards to set expectations and better facilitate new partner engagement.
If industry best practices are the starting point for defining the rules and terms for BNPL, the natural evolution from that model is the development of an industry self-regulation scheme. Fintech providers and startups offering BNPL services as well as card brands like Mastercard and Visa and payments service providers can all come together and form a body that sets and agrees to create terms for responsible use.
The Unique Challenge of U.S. Federal Regulation
While regulators in countries like the U.K. are signaling that they’re going to step in to regulate in the BNPL space, regulators from other countries like the U.S. have yet to wade in. When it comes to the nature of BNPL, however, regulation in the U.S. faces some difficulty due to the bifurcated nature of financial and consumer regulation. On one side, the FTC as well as state laws define the terms of credit lending while the CFPB focuses on issues specific to consumer safety.
If confirmed to lead the CFPB, Chopra, having also been the commissioner of the FTC, will bring a unique understanding of how the CFPB and FTC can work together on a regulatory framework for BNPL. It's yet to be seen if and how states, businesses and agencies could come together to create regulations around BNPL services. However, it will be important for any regulation — whether self-imposed, developed industrywide, or brought forth by the government — to ensure the system is inclusive to all consumers.
Consumers Shouldn’t Be Left Out by the Future of Payments
While the BNPL space rapidly grows, redefining how millions of consumers shop and pay for goods, it’s important to understand who is using these services and why. Without that understanding, regulations could run the risk of creating unintended consequences, excluding certain groups of people from being able to participate and express their financial freedom.
Credit cards, for example, are a highly regulated way to create lines of credit while ensuring protections for consumers and merchants alike. While BNPL presents an opportunity to enhance the buying power of people who have been historically excluded from recurring lines of credit, they also present a potential risk.
With consumers spending anywhere from 10 percent to 40 percent more with BNPL than they normally would have, it’s important that financial literacy programs accompany these new products to encourage responsible use.
The goal of good regulation is to protect people and businesses and ensure financial products are accessible and affordable. BNPL is clearly disrupting the way credit works across the world, which carries great opportunity for consumers. In taking steps to responsibly manage this sector as it grows and matures, both the industry and regulators can proceed in a way that ensures the benefits of BNPL are not needlessly curtailed.
Jim Johnson is executive vice president, head of merchant solutions at FIS, a leading financial services and technology provider.