BNPL Regulation: What will happen the day after the regulator comes calling?

by Yaacov Martin


October 18, 2021

There’s been a lot of murmuring in the media of the need for BNPL regulation in major global markets, such as the US, Australia and the UK.

With the Consumer Financial Protection Bureau (CFPB) conducting an inquiry into the practices of five leading BNPL providers, it looks like BNPL regulation is just around the corner.

While the focus has been on if and when BNPL will be regulated, the notion of what will happen the day after the regulator comes calling has pretty much been ignored. 

Who will survive the Buy Now Pay Later (BNPL) regulatory clampdown when it eventually happens?


Why is BNPL regulation on the table?

BNPL in itself is not the problem – it’s an age-old financing concept that’s been modernized. These modern processes, which aren’t built on historical data, give way for regulatory concern.

From the regulator’s standpoint, the risks of unregulated BNPL are much wider than simply controlling approval rates and fees. The bigger picture paints a much more precarious scenario for the regulator – one in which economic stability as a whole is at risk. 

BNPL currently remains under the radar for three main reasons:

BNPL regulation

While these low barriers are precisely what make BNPL so appealing to consumers, they can add up to a large amount of debt. As far as the regulators are concerned, this accumulative debt is completely off the books. The fact that racking up debt in bite-sized amounts has been made so easy for the consumer is exactly what presents the danger in the regulator’s eyes. 

As it stands today, there is no way of tracking the relationship between debt accumulation and the GDP when BNPL is untethered. Consumer debt gets bigger and bigger, and the regulator remains in the dark – unaware of exactly how much debt has accumulated.

Since the regulator’s job is to regulate consumer debt and manage its effect on the economy, this potential domino effect on the economy is what’s keeping the regulator up at night.

Watch the LendIt Fintech webinar recording to hear what industry leaders have to say about BNPL regulation:

What to do to swim and not sink?

There are essentially two categories of players in the BNPL space:

  • Traditional financial institutions, including banks, credit card companies and traditional lenders
  • Tech companies, such as fintechs and even big tech companies

And while BNPL has become the generic term for any consumer financing offered at the point of
sale, not all BNPL products and companies are the same. There are those that already do report to the credit bureaus and offer products that are already underwritten.

Banks, for example, which already comply with regulatory standards will be positioned to withstand the pullback and even thrive in an environment in which they are already well-entrenched.  

When the brakes are put on BNPL, non-compliant BNPL providers will need to adapt or risk sinking, leaving ample opportunity in quick-split BNPL for other players. 

The most adaptable will survive BNPL regulation

The regulator could come knocking as soon as 2022 but the time to act is now. BNPL players that want to survive and thrive in a new regulatory environment and changed landscape need to strategize now on how to capitalize on their strengths and overcome their weaknesses in the BNPL space.  For banks and lenders, this may mean adjusting their consumer loan programs to meet consumer demands for instant split payments. For fintech companies, their very foundations may need to be shifted in order to comply with new regulation. One example is Klarna, who is already preemptively overhauling its BNPL program in the UK market.

At the end of the day, BNPL is a paradigm shift in consumer finance, and not just a passing trend. Planning for the future and not ignoring the inevitable regulatory pushback is essential for banks and fintechs that want to succeed in the space.

BNPL Handbook for Banks and Lenders

What do you think the post-regulation BNPL landscape will look like? 

Disclaimer: The information in this article is for informational purposes only, and should not be construed or relied upon as legal advice on any subject matter. The author is not responsible for any consequences whatsoever arising from the use of such information.

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