Jan 5, 2022 - Economy & Business

Washington puts "buy now, pay later" industry on notice

Illustration of a plastic "thank you bag" that instead reads "IOU" repeated
Illustration: Sarah Grillo/Axios

The buy now, pay later (BNPL) industry — an increasingly important driver of retail sales — could face new rules as D.C. scrutiny builds.

Driving the news: The Consumer Financial Protection Bureau is peering into the policies of Affirm, Afterpay, Klarna, PayPal and Zip — a few of the most notable players in the BNPL industry..

  • The move comes after half a dozen lawmakers, including Sens. Elizabeth Warren (D-Mass.), Jack Reed (D-R.I.) and Sherrod Brown (D-Ohio) called on the agency to review BNPL services.

Why it matters: The CFPB is concerned these platforms may encourage overspending and dodge existing regulations around credit and lending. It also plans to examine data collection practices.

  • Billions of investor dollars are potentially at stake: Just last year, Square (now Block) paid about $29 billion to buy Afterpay.

The review is "a first step toward having a full picture of the BNPL market," Laura Udis, the CFPB's small dollar, marketplace and installment lending program manager, tells Axios.

How it works: Consumers can qualify and get approved for BNPL purchases much faster than for a new credit card, and they can take home the product before fully paying it off — typically through installments with little to no interest or fees.

  • Like credit card companies, BNPL platforms charge stores a percentage or flat fee for each sale.

State of play: Major retailers like Walmart, Target, Amazon, Nike and Nordstrom, as well as a growing number of smaller businesses, offer BNPL as a way to break up purchases into multiple installments.

  • The payment option has helped drive $97 billion in e-commerce sales in 2020, according to research from payments giant Worldpay — and it’s growing fast. The same study estimates BNPL will grow from 2.1% of 2020 global e-commerce transactions to 4.2% by 2024. 
  • Retailers can see their average ticket sizes increase between 30% and 50% when the option is offered, according to RBC Capital Markets, CNBC reported.

At this stage, the CFPB is requesting data (due March 1) to better understand the benefits and downsides of this fast-growing model, for which public data is scant since many of the providers are privately owned.

The big question: How the agency acts on this information — though that could take months or even years to materialize.

  • "It is certainly possible that we could as a result of the data collection take enforcement action. … We might issue advisories or guidelines, but that’s really premature and sort of putting the cart before the horse," says Udis.

What they’re saying: BNPL companies say they are prepared to work with regulators.

  • “We believe proportionate regulation is a good thing,” a representative for Klarna wrote in an email. Affirm, Afterpay, Zip and PayPal each echoed the sentiment when reached for comment.
  • It's also worth noting that Klarna hired lobbyists from Cypress Advocacy and Forbes-Tate Partners, per mid-December disclosures — signaling they plan to play a proactive role in crafting any potential regulation.

The big picture: This is a balancing act, as always, between innovation and regulation.

  • Currently, BNPL providers aren't regulated as heavily as credit cards. The CFPB also warns that some BNPL loans may not have the same consumer protections around fraud disputes as their more well-worn brethren.
  • The CFPB's move comes at a time when the agency has shown that it has more teeth than it did under President Trump.

The bottom line: The CFPB is signaling that BNPL is not flying under the radar.

Editor’s note: This story has been updated to state that BNPL drove $97 billion in e-commerce sales in 2020 (not last year).

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