Buy Now, Pay Later (BNPL) is hailed as the modern layaway plan. BNPL has become one of the most popular forms of credit access in recent years as it offers an alternative to the traditional credit card. In 2024, 15 percent of American consumers used BNPL.
However, regulation would restrict competition among BNPL companies, preventing them from improving their services to attract customers while limiting consumer choice in financial decisions.
As with most good things, potential regulations were quick to appear. In May 2024, the Consumer Financial Protection Bureau (CFPB) issued a rule seeking to apply Regulation Z, otherwise known as the Truth in Lending Act (TILA), to BNPL lenders. The rule stated that BNPL lenders should be subject to the rules of credit card issuers.
The CFPB received public comments from BNPL lenders, such as Affirm, which reminded the CFPB that BNPL does not operate like traditional credit cards. Therefore, the rule could not be applied without altering the type of credit they offer. For example, the rule would require disclosures for account openings. But BNPL lenders are one-time use lenders. Consumers who choose to use the service are viewed as new customers each time they enter into an agreement.
Fortunately, the current CFPB leadership revoked the rule earlier this year because it was not an appropriate model for BNPL.
Despite dodging a bullet at the federal level, states are passing their own legislation that impacts BNPL. New Mexico passed H.B. 132, capping interest rates at 36 percent, which took effect in 2023. This price control resulted in the BNPL company Afterpay pulling out of New Mexico. They weren’t the only ones. Klarna also stopped doing business in New Mexico, citing local laws as the reason.
Most recently, New York passed the Buy-Now-Pay-Later Act. It requires BNPL lenders to acquire a license to operate and sets maximum fees a lender can charge. Lenders are also subject to interest rate caps and other regulations modeled after Regulation Z. Just like in New Mexico, this legislation could drive out BNPL companies from operating in New York.
Critics of BNPL call this service predatory because, if not paid on time, it can result in high fees and interest rates. Additionally, it tends to be utilized by people in demographics who are often unbanked or underbanked individuals. However, labeling BNPL as predatory removes agency from its users.
Some critics are concerned as there tends to be an increase in retail spending for shoppers using BNPL. However, regulation should not be based on stopping consumers from spending their own money, especially when it would reduce financing options for those with limited choice. A working paper from the National Bureau of Economics stated: “[BNPL] expands payment and credit access to underserved consumers without increasing indebtedness or delinquencies despite their spending more.”
Harvard Business Review research analyzed consumer spending patterns for those using BNPL versus those who did not. While the analysis was negative in tone, it found that consumers experienced higher levels of satisfaction. Increasing consumer choices, regardless of potential vulnerabilities, should be seen as positive.
Regulation could stifle consumer choice and has already been shown to do so in states like New Mexico. This type of credit has had few consumer complaints. It is important to let the market compete to make it even more consumer-friendly.
For BNPL companies, this is an opportunity to establish loyal customers with incentives that can be simple and cost-efficient to implement. BNPL companies can report payments that are made on time to help consumers establish good credit. Returns have been a number one complaint of consumers, and BNPL companies should work with merchants to develop better ways to return merchandise.
BNPL is not a predatory lending scheme. Consumers have the right to purchase the goods they want without someone restricting their access. Regulation should not get in the way.