Regulations for the BNPL Lenders
Based on where you are in the world, government regulations specific to BNPL companies vary. Click on your location below to see what the current regulations are in your part of the world.
According to a study by Credit Karma, 40% of US consumers who used BNPL have missed more than one payment, and 72% of those saw their credit score decline. Fitting BNPL into the US regulations is relatively challenging since laws vary by state. Overall, BNPL schemes are regulated by federal and state laws under consumer credit regimes, depending on the different definitions of credit covered by those laws. The credit reporting system in the US is also leveraged for BNPL. Lenders may consult credit reporting bureaus to check the credit standing of the purchaser, which credit checks are subject to regulation under the US Fair Credit Reporting Act. In more general terms, credit checks, ‘as an indication of ability to repay, may serve as a proxy for an assessment of affordability, but they have not been recognized as such.' Moreover, the loan regulations in the country can’t be fully applied to BNPL providers, because they don’t make loans per se to consumers, but they facilitate and support the installment plans, on behalf of the customer.
A recent hearing of the House Financial Services Committee's task force called on the CFPB to examine the industry further. More to come on this, but it's fair to assume that formal U.S. regulation is coming, specifically a requirement for BNPL lenders to assess a consumer's ability to repay before approving the loan.
In December 2021, the CFPB opened an inquiry to BNPL credit, requesting information on the risks and benefits from Affirm, Afterpay, Klarna, PayPal, and Zip. The CFPB is concerned about accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology. The Bureau is working with its international partners in Australia, Sweden, Germany, and the UK, specifically the Financial Conduct Authority. The Bureau will also be coordinating with the rest of the Federal Reserve System, as well as its state partners.
Additionally, Equifax will add the pay-in-4 data to credit reports beginning at the end of February 2022. Both positive and negative information, on-time payments and defaults, will be included in reports and reflected in consumers’ credit scores, Equifax said.
At the beginning of 2021, the Financial Conduct Authority (FCA) stated that ‘billions of pounds were being lent in unregulated transactions’ and that more than 10% of consumers who had used a BNPL option were already overdue. This led to a review of the unsecured credit market, led by Christopher Woolard, former interim Chief Executive of the Financial Conduct Authority (FCA), which urgently recommended regulating all BNPL products. The Woolard Review set out 26 recommendations for the FCA, UK government, and other bodies to reform the unsecured credit market. The recommendations take into account the impact of the COVID-19 pandemic, changing business models, and new developments in unregulated BNPL unsecured lending.
In July 2021, the FCA published its 2021/22 Business Plan, which stated “Deferred Payment Credit: The Woolard Review recommended bringing the currently exempt Buy Now Pay Later sector (now referred to as ‘Deferred Payment Credit’) into regulation. Subject to the Treasury’s consultation on the scope of the regime, we plan to consult on new rules in 2022 and are developing our approach to the authorisation gateway and supervision.
At the European level, several policymakers believe that BNPL providers fall short of consumer ethics principles. Secretary-General of the Swedish Consumers' Association, the European consumer rights group BEUC, Austrian consumer organization Arbeiterkammer are a few entities that questioned the way BNPL companies meet their liabilities in terms of obligations against the law. The EU’s Consumer Credit Directive rules of which are currently under review by the Commission, and adoption of the consumer credit review is planned for the second quarter of 2021.
Based on ASIC data, the number of transactions increased in the country from 1.9 million in June 2018 to 3.4 million in June 2019, representing a surge of 75%. What’s more, the number of BNPL accounts had climbed to 6.1 million by June 2019, representing 30% of the nation's adult population, yet 21% of BNPL users missed a payment in the last 12 months.
BNPL providers enjoyed a relaxed regime in Australia, as the provisions of the Australian National Consumer Credit Protection Act of 2009 do not apply to certain types of loans, including short-term interest-free credits. The industry has eventually adopted a self-regulatory approach. The Australian Finance Industry Association (AFIA) announced on the 1st of March 2021 that its Code of Practice for the BNPL sector has come into effect. According to their statement, ‘AFIA’s BNPL Code goes above and beyond the law in Australia, setting best practice standards for the sector and strengthening consumer protections. It does this while preserving customer choice to make purchases and payments in a way that suits their needs and preferences.’
BNPL providers that are compliant with this Code must carry out assessments before a customer can make a purchase and conduct additional checks to prevent consumers from stretching their arm further than their sleeve will reach. BNPL disputes under the code will be managed by the Australian Financial Complaints Authority, where a designated committee will have the power to publicly denounce companies that provide loans services outside the Code’s standards.
The current regime allows BNPL payment options to be quick, easy and available to all consumers, regardless of credit history. At the same time, the sector is more vulnerable to fraud and does not offer consumers the same protections as those available to users of traditional credit services. On 23 June 2021, the Minister for Finance published the Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Bill 2021 (the Bill). The Bill, if enacted in its current form, will bring the BNPL sector squarely within the scope of Irish financial regulation.
The Bill extends the definition of "credit" in the 1997 Act to include BNPL arrangements. The extended definitions will bring all BNPL providers within the scope of the regulatory regime for Retail Credit Firms, even those that provide credit indirectly via retailers. Retail Credit Firms are required to make an application for authorization to the CBI. Applicants must demonstrate that they are able to meet the applicable authorization requirements and standards, including in relation to governance and management, staffing, credit policy, IT systems, outsourcing and ownership.
Unregulated firms carrying on BNPL should consider the terms of the Bill and start preparing their applications for CBI authorization. Firms will have only three months from the coming into operation of the legislation within which to make their formal application to the CBI.
Sweden passed the Swedish Payment Services Act in 2020, aimed to discourage online shoppers from paying with credit—including BNPL products. The Act requires merchants to present the payment methods that do not put the consumer into debt and forbids them from pre-selecting paying by invoice or installment loans in their online checkout.
At the beginning of 2021, some tensions occurred in California. The California Department for Business Oversight (DBO), a division of the state government that regulates financial services, has taken over several cases focused on BNPL services. These cases referred back to the California Civil Code which defines a loan as “a contract by which one delivers a sum of money to another, and the latter agrees to return at a future time a sum equivalent to that which they borrowed.”
Back in 2020, the California Department of Financial Protection and Innovation (then known as the Dept for Business Oversight or “DBO”) took several actions against BNPL companies for issuing illegal loans, referring back to the California Civil Code which defines a loan as “a contract by which one delivers a sum of money to another, and the latter agrees to return at a future time a sum equivalent to that which they borrowed.”
As part of this, the DFPI concluded that point-of-sale (buy-now-pay-later) financing transactions may be deemed loans when:
- The consumer, merchant, and third-party financer treat the transactions like loans, despite contradictory language in the applicable contracts;
- The relationship between merchant and third-party financer is extensive;
- The role of the third-party financer and all financing terms are not clearly disclosed to the consumer; and
- The financing transaction is not otherwise regulated.
In November of 2021, the Financial Consumer Agency of Canada (FCAC) published a study on BNPL services with the goal of broadening the Agency’s understanding of the BNPL market in Canada, from the perspective of Canadian consumers.
Among other things, the study found that BNPL consumers aged 18 to 34 are most likely to use an online BNPL service, whereas users 65 and over appear more likely to use a credit card-based service. The most common reasons consumers use BNPL services were to help with budgeting, to afford a purchase that they would not be able to afford by paying all upfront, and to avoid interest and fees.
The Monetary Authority of Singapore (MAS) is assessing if a regulatory framework is needed to guide BNPL payment options as they become more widely used, including the adoption of fair dealing practices by BNPL providers.
BNPL schemes currently “do not pose a significant risk to household indebtedness” in Singapore given how they are not widely used compared with other payment methods, but the increase in regulatory attention in countries like the U.K. and the United States is anticipating increased usage of BNPL products in the country.