With success comes additional scrutiny. A recent Federal Reserve survey indicates that three-quarters of Americans are familiar with Buy Now Pay Later (BNPL) services, and nearly 10% had accepted such a deferred payment offer in the past 30 days. A modernized take on installment lending for the digital age, BNPL's rapid rise has attracted the attention of lawmakers, regulators, and companies with various stakes in the payments ecosystem.
The space has been particularly active this year. Let's recap some of the latest developments relevant to standalone BNPL providers and a growing number of card-issuing banks and credit unions exploring their offerings.
Chase and Apple Diverge, New York State Signals Regulatory Move
Chase has announced that starting in October, account holders may no longer use Chase-branded credit cards to make installment payments to third-party BNPL providers. Theories abound regarding the major issuer's motives for this move. Some analysts speculate it's a risk mitigation play, given that any such charges amount to financing a debt already deferred. Others believe Chase may be looking to insulate itself from regulatory complexities that are likely to emerge. The most straightforward take, however, is that Chase hopes to steer customers to its "Pay in 4" product, providing the bank better visibility into the transaction, not to mention a more robust revenue stream.
Apple has taken the opposite approach. Not only has it discontinued its much-hyped Apple Pay Later product after just nine months in the market, but the company is explicitly touting partnerships with third-party BNPL providers like Affirm, citing the ability to "bring flexible payments to more users" globally. Interestingly, this may complicate the use of Chase branded cards within Apple Pay, based on the change of heart from Chase noted above.
New York state seemed poised to become the first to regulate BNPL on a state level – always a tricky compliance proposition for participants facing many state-specific laws. Governor Kathy Hochul kick-started the process in January by proposing that BNPL providers be required to obtain a license to operate in the state. The State Assembly and Senate introduced separate bills applying similar guardrails, including fee limits, disclosure requirements, dispute resolution parameters, and data privacy measures. Despite the drafts being largely coordinated, the legislature adjourned without voting. However, the groundwork now exists for the effort to re-emerge in early 2025.
The CFPB's New Interpretation
The CFPB, acknowledging that BNPL "is now a major part of the consumer credit market," recently issued an interpretive rule that classifies BNPL lenders as credit card providers, aiming to apply several Truth in Lending Act provisions to these loans.
The CFPB's interest in BNPL stems from the same concerns motivating the State of New York, primarily consumer protection and data privacy. One clear requirement proposed by the CFPB is the issuance of periodic billing statements like those provided for traditional credit card accounts. The CFPB also aims to mandate more defined dispute resolution processes and timely credits when consumers return products or cancel services – a CFPB-issued survey implied that 13% of BNPL transactions result in returns or disputes.
The Bottom Line
The increased focus on BNPL from lawmakers and the CFPB clearly signals that regulatory changes are coming. It's also an excellent example of innovation driving regulation, as regulators find themselves playing catch-up with a rapidly growing and evolving service.
By contrast, issuers have an opportunity to engage proactively, ensuring their practices align with anticipated regulation. This may require investing in tracking and reporting systems, instituting new processes similar to consumer lending, and adjusting existing business models. By prioritizing transparency, consumer protection, and data privacy, BNPL providers and issuers can comply with new regulations and build customer trust and loyalty in the process.
Keith Ash, Managing Director, brings two decades of experience in the banking industry, advising leading financial institutions on strategic initiatives. Further inquiries may be made by emailing Keith at kash@srmcorp.com.