On July 30, an interpretive rule from the Consumer Financial Protection Bureau went into effect confirming buy now, pay later lenders are in fact credit providers. This means BNPL customers have the same legal and federal protections as credit card users.
For example, they can dispute charges and demand refunds for returned products. BNPL companies, such as Klarna, as well as banks and credit unions offering BNPL options are required to investigate disputes, pausing payments during these investigations.
Some argue this doesn’t really change anything as most major BNPL providers were already doing this. However, there’s agreement that putting such rules in place is a strong first step in providing more protection for consumers using BNPL.
The U.S. has been experiencing a time of persistent inflation where people are increasingly having to stretch household budgets. Because of this, we’ve seen an increase in consumers using BNPL options. Data from Adobe showed that $25.9 billion of e-commerce spend in the first four months of 2024 was driven by BNPL platforms.
The new guardrails should be seen as a good thing. The interpretative rule will likely make consumers feel more positive about BNPL options.
However, it’s worth noting that increased trust in BNPL carries a potential risk of overspending and more debt. With that, there’s an opportunity here for brands and financial institutions to provide more transparency for consumers and educate them on credit responsibility.
Back-to-School Season is the First Big Test
The new CFPB rule came at a good time as we head into the back-to-school shopping season. This shopping period begins earlier and earlier each year — almost as soon as school lets out for the summer. It presents a prime time to see how BNPL rules and regulations can better support consumers.
With inflation turning BNPL into more of an affordability tool, spikes in use may occur in its use during back-to-school shopping as both families and educators look to outfit students and classrooms for the coming school year.
In fact, 2023 data from TransUnion found nearly half (45%) of households looked to use BNPL to purchase a collection of back-to-school items their children needed. And 36% planned to use this method to purchase an expensive item that was needed, like a computer or tablet.
From books to calculators to paper and pens, BNPL helps shoppers obtain necessary items for school that they might not be able to purchase otherwise. As we see more reports of teachers buying supplies for their classrooms out of their own pockets, BNPL poses a support to already strapped budgets.
At the university level, college students often need bigger ticket items like expensive textbooks for their classes and bedding or furniture for students living away from home. Couple this with things like tuition fees and financial aid woes, and BNPL could be a very attractive option for college students who have a lot of expenses at the start of the school year.
Read more:
- CFPB’s Foray into BNPL Regulation Stirs Ire and Interest
- After Apple Bows Out, How Do the Remaining BNPL Players Shake Out?
- Apple Shifts Focus As It Drills Deeper into Payments
Two Financial Options Face the Same Challenge
The CFPB rule puts fintech organizations and traditional institutions alike against a singular challenge – conforming to and complying with standardized regulations while business models across BNPL vary vastly in complexity.
Fintechs have to continue navigating rapidly changing regulation. On the other hand, traditional banking institutions are well versed in additional regulations and complexities, but many are only now launching BNPL solutions, creating a new, complex territory. Lenders from both sides must consider changes to such duties as billing rights, disclosures, and statements.
The possibility for increased operational burdens plagues both fintechs and traditional institutions, so transparency around policies and practices as well as education on credit and the use of BNPL is critical for getting compliance right.
Lean into Transparency with Your BNPL Program
Brands providing transparency to their customers around policy, supply chain, pricing and more is not a new concept. With BNPL, the opportunity lies in providing clearer disclosures around terms and conditions as well as the structure of the solution they are using. Many consumers may not be aware of all the fine print or understand specific BNPL details.
Where the CFPB rule supports is in helping to establish more standardized terms and conditions that all providers must use, as with credit cards. This can make it easier for consumers to understand and absorb what is required of them for each BNPL agreement they enter.
For example, a consumer may have a credit card from their bank, and they may also have one to three additional credit cards from retailers they frequent. While some of these cards will have brand specific nuances baked in, the terms and conditions for all will largely be the same and follow similar rules and guidelines.
Read more: Shocker: Amex, Chase and Citi Top BNPL Satisfaction Rankings
Take the Time to Educate BNPL Users
The CFPB rule presents a prime opportunity for fintechs, banks and credit unions to take a more active role in educating consumers around credit. Consumers need to understand how detrimental bad credit can be, both now and in the future, and they only stand to benefit from learning more about how to have good credit.
I see this as being especially important for younger generations. The everyday consumer may not view BNPL as a form of credit, especially younger consumers who have less experience handling financial freedom. Without proficiency in financial wellness, BNPL options seems like a great way for those on a budget to make big purchases affordable — when they aren’t. This could ultimately lead to overspending.
The opportunity for lies in focusing on consumer awareness, providing more information and insight around what different purchase and payment formats are and how they work.
Read more: Affirm Goes Big: How It Intends to Go Beyond BNPL to Own Payments
Just the First Round: More BNPL Regulation is Coming
I anticipate the CFPB’s interpretive rule in just the beginning. We’ll see more rules and regulations around BNPL and those will need to evolve over time as consumer spending changes.
The focus must be put toward getting everyone on the same page. We need to consider what the basics are that consumers need to know about BNPL and carry that across the board. Standardization and keeping consumers informed and knowledgeable are the critical next steps that must be addressed for this growing family of credit products to continue succeeding.
About the Author
Lisa Nicolas is senior vice president for financial institution marketing products and strategy at Vericast.