BNPL can lead to bad debt and overspending!

Time for more regulation and what does this mean for retailers?

In May 2024, the Consumer Financial Protection Bureau (CFPB) decided that BNPL providers must handle disputed purchases, provide refunds, and offer monthly billing statements. The CFPB is an independent agency of the United States government responsible for consumer protection in the financial sector. This new interpretive rule from the CFPB takes a view of what constitutes a “credit card” for purposes of Regulation Z by likening the “digital user accounts” that consumers use to access BNPL credit products to traditional credit cards.

The latest CFPB ruling on BNPL has the potential for both positive and negative impacts on retailers:

Positive Impacts:

• Increased Consumer Confidence: The new regulations might boost consumer confidence in using BNPL options. Knowing they have clear rights for refunds, disputes, and billing statements could encourage more customers to adopt BNPL, potentially leading to increased sales for retailers.

• Reduced Risk of Disputes: With clearer dispute resolution processes, retailers might experience fewer disputes initiated by customers who go through a BNPL provider instead of directly contesting the transaction with the retailer. It remains to be seen how consumers react to the new rules.  

Negative Impacts:

• Increased Operational Costs: Retailers might need to adjust their internal processes to handle potential refund requests routed through BNPL providers. This could involve additional steps and potentially higher costs.

• Potential Delays in Payments: The new regulations require BNPL providers to investigate disputes before releasing funds to retailers. This could lead to delays in receiving payments for some transactions.

• Uncertain Impact on Consumer Spending: While the regulations might build trust, it's unclear how they will affect overall consumer spending behaviour. Some experts suggest BNPL can lead to overspending, but the impact of the new rules on this remains to be seen.

Overall, the impact on US merchants is likely to be mixed. While there are potential benefits from increased consumer confidence and reduced disputes, retailers might also face increased operational costs and potential delays in processing payments.

The CFPB is open for comments by 1st August 2024. This comment period allows interested parties, including retailers, US consumer groups, and BNPL providers, to express their opinions and concerns about the new rule. The CFPB will consider these comments before finalising the rule, an exact date for the rule implementation can vary depending on the volume of comments received. Meanwhile, it has already generated some comments in the public domain. Max Levchin, for example, the CEO of Affirm who specialises in BNPL services, recently stated on X that the company is “pleased that the Bureau [the CFPB] is promoting consistent industry standards many of which already reflect how Affirm operates”. The leading BNPL providers already offer returns and refunds options as part of their value proposition to customers, but these are not a compliance requirement. Last month John Craske, a spokesperson from Klarna, the Swedish Fintech and BNPL provider, told The Verge, an American technology news website; “…it is baffling that the CFPB has overlooked the fundamental differences between interest-free BNPL and credit cards, whose whole business model is based on trapping customers into a cycle of paying sky-high interest rates month after month.”

What are the implications for UK and EU regulators?

While the US ruling offers valuable insights, the Financial Conduct Authority (FCA) should tailor regulations to the specific characteristics and needs of the UK BNPL market. The regulations should be balanced, ensuring consumer protection without placing excessive burdens on BNPL providers that could stifle innovation. In the UK, BNPL services do not currently offer protection under the Consumer Credit Act, but they may offer their own purchase protection or extended warranty cover instead. The UK Government has proposed in 2023 that BNPL providers be regulated by the FCA, with complaints to be handled by the Financial Ombudsman Service (OFS). Proposals also include BNPL providers having to carry out similar checks to other lenders, like when applying for a credit card or loan.

For the European Union, BNPL services currently do not fall within the scope of consumer credit legislation. With the revised European Consumer Credit Directive (2023/2225/EU) published on 30 October 2023, this is going to change, resulting in offering BNPL services being subject to supervision in certain instances. This is not expected to be part of member state law until November 2026 at the latest.

Regardless of the markets you operate in, BNPL providers are expected to incur greater compliance costs. These costs might be passed on to retailers through higher fees or changes in BNPL service agreements. There is an evolving regulatory landscape when it comes to BNPL and the BNPL industry is relatively new, so regulations could continue to evolve. By understanding the potential impacts, retailers can adjust their strategies and adapt to the changing BNPL landscape. Retailers must stay informed about any updates that might affect their operations and their checkout sales conversion rates. If you need to know more, please do not hesitate to contact the author or Edgar, Dunn & Company (EDC).

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‍The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).