Buy now, pay later (BNPL) instruments offered by companies such as Klarna, Affirm and Afterpay are becoming so widely used that it was only a matter of time before regulators decided to look closely at these (usually unregulated) products. In this regard, the United Kingdom may be the first country to enact new regulations for BNPL in 2022, bringing legal certainty to companies and more protection for consumers.
Like traditional credit card products, BNPL products allow consumers to buy now, enjoy the good or service and pay for it later. Repayment is where BNPL is different – payment is in equal installments over a specified period of time, usually up to four months, without any interest as long as the consumer pays on time. However, missing a payment or spreading the cost over a longer period of time could result in late fees, penalties or high interest rates. Interest rates are also pegged to the credit risk of the borrower – more risky consumers can obtain a BNPL loan, but just at a higher rate.
As a result of the increasing popularity among younger consumers and those who may have thin credit files, regulators across the globe began questioning the degree to which consumers could face risk unless they are fully aware of how BNPL works. That is particularly true in the jurisdictions that don’t consider BNPL a credit product given its interest-free and short-term duration. That’s the grey area on which regulators are most focused.
While many countries are actively looking into passing new regulations, including the European Union and Australia, the United Kingdom may be the first country to bring specific rules for BNPL. This is how some countries are dealing with the pressing issue of regulating BNPL products.
BNLP products have been offered in the U.K. using an exemption in the Consumer Credit Act for delayed payments of goods or services. However, a recent report prepared for the government suggested that this regulatory exemption did not aim to include BNPL products.
As a result, in October 2021, the government launched a public consultation seeking comments from stakeholders about imposing proportionate regulatory controls for BNPL. This consultation will end on Jan. 6. After reviewing these opinions, the government is expected to propose new regulation, which could be adopted in 2022.
For the time being, BNPL firms such as Afterpay, Zip Co and Sezzle can operate in the country. Yet, the central bank adopted a decision in October ordering BNPL firms to remove their no-surcharge rules. This means that merchants are permitted to apply a surcharge to customers for using this method of payment if they wish to offset fees paid to the BNPL providers.
On Dec. 8, Treasurer Josh Frydenberg delivered a speech proposing a major overhaul of the Australian payments system, including new regulation for BNPL products. The new proposals, which may include changes in the current legislation, are expected by mid-2022.
The European Union is tightening its rules on consumer credit to provide more protection for consumers. In June, the European Commission presented a new proposal to regulate consumer credit, bringing BNPL products under the scope of the regulation.
This proposal will require BNPL firms, for instance, to provide more information to consumers and not solicit consumers without their permission, but fall short of imposing more significant prohibitions. However, consumer credit is also regulated at the member state level, with wide disparities among them. Thus, it is possible that the European Commission will seek further harmonization of BNPL regulation in the future across all of the countries operating within it.
In the U.S., BNPL remains largely unregulated. This is because BNPL products fall outside regulations for more traditional, longer-term credit products regulated by the Truth in Lending Act.
In July of 2021, the Consumer Financial Protection Bureau (CFPB) published a series of recommendations on its website about these products and the potential risks for consumers. In November, the House Committee on Financial Services held a hearing on the risks and benefits of BNPL and urged the CFPB to look more closely at BNPL firms to better understand their products.
The latest remarks came a few days later, in December, from CFPB Director Rohit Chopra, who emphasized the need to address overdraft fees from banks and other institutions. While he didn’t name BNPL products specifically, some references could be seen as a message that the CFPB will continue to monitor developments in the space.