Home Slider Explosive BNPL Growth Prompts Calls for Greater Regulatory Oversight

Explosive BNPL Growth Prompts Calls for Greater Regulatory Oversight

by internationalbanker

By Cary Springfield, International Banker


The more I dig into it, the more concerned I am,” Tim Quinlan, a Wells Fargo economist, told the New York Times on December 20. Quinlan’s concern involved buy now, pay later (BNPL) loans, which he went on to describe as “phantom debt” that, according to his bank’s estimates, were worth about $46 billion in total last year. While that figure pales in comparison to the $3 trillion that Americans amassed in credit-card debt in 2023, the explosive growth of BNPL, coupled with the often weaker financial positions of those most likely to rely on such loans, means that the most vulnerable segments of consumers could be exposed to even higher levels of indebtedness. As such, calls for greater regulatory scrutiny of the BNPL sector continue to grow worldwide.

The growing popularity of BNPL, as evidenced by the successes of such firms as Klarna Bank, Afterpay, Zip Co and PayPal, only further illuminates the potential damage it can inflict on the most financially insecure. According to an analysis published by Polaris Market Research in December, the global BNPL market will expand from $6.24 billion in 2022 to a massive $80.52 billion by 2032. The study also predicted market growth from 2023 to 2032 at a robust 29.2-percent compound annual growth rate (CAGR). The BNPL market size “has been propelled in large part by the growth of online shopping”, the study noted. “Customers are looking for convenient and efficient payment options as online shopping becomes more and more popular. The seamless integration of BNPL services into online checkout processes guarantees a simple and convenient payment process.”

Typically structured as instalment loans, BNPL enables consumers to divide certain purchases into smaller payments over time, with the first payment of, say, 25 percent of the total price being due up-front at the time of checkout. The remaining payments are then taken from the consumer’s bank account or credit card in instalments, usually several weeks or months apart, until the full transaction amount is paid. The main upside to such a payment mechanism is that it frees a consumer from immediately rendering the entire payment requirement at the time of purchase. And should the consumer fulfil the remaining payment obligations on time, the BNPL merchant charges minimal or no interest.

Should consumers fail to make outstanding payments on time, however, interest and other fees can rise steeply, which, in turn, can plunge those who are already financially strained more deeply into debt. This can prove hugely damaging, particularly during holidays or festive periods such as Christmas, when people are inclined to spend more amidst a culture of gift-giving that can put serious pressure on their finances. Not only can BNPL be seen as a short-term solution to alleviate such pressure, but from the merchant’s standpoint, it can help to bolster sales during such periods significantly, thus raising the prospects further down the line of the mounting “phantom debt” to which Wells Fargo’s Tim Quinlan referred.

The expected significant growth of BNPL globally over the coming years further underscores the need for regulators to intervene and apply appropriate rules to protect consumers. Indeed, a March 2023 report by the United States’ Consumer Financial Protection Bureau (CFPB), an independent government agency responsible for consumer protection in the financial sector, found that the number of BNPL loans issued to consumers between 2019 and 2021 increased by almost tenfold. Although many BNPL borrowers observed by CFPB used the product without any noticeable indications of financial stress, BNPL borrowers were, on average, much more likely to be highly indebted, revolve on their credit cards, have delinquencies in traditional credit products and use high-interest financial services such as payday, pawn and overdraft loans compared to non-BNPL borrowers. BNPL borrowers also had higher credit-card utilisation rates and lower credit scores, the study noted.

The United Kingdom’s main financial-services watchdog, the Financial Conduct Authority (FCA), expressed similar concerns in October over those who frequently opted for BNPL financing, as they were deemed more likely to be experiencing financial difficulties and to have also missed a bill payment or debt-repayment obligation. With Britons experiencing sharply rising costs of living last year, moreover, many turned to unregulated BNPL providers to gain access to financing more easily.

As the FCA also recently stated, customers who opt for unregulated BNPL schemes have fewer rights and protections; for instance, they cannot bring a complaint to the Financial Ombudsman Service if something goes wrong. “While BNPL products can provide a useful way to spread the cost of a purchase for some people, it’s important that consumers are aware that many BNPL products remain unregulated,” the regulator noted in November. “This means that firms, even if they are regulated by us for some of the products and services they offer, are not required to ensure that exempt BNPL products meet our rules, such as checking that a customer can afford to repay the loan.”

Calls for greater regulatory oversight over the BNPL sector have grown. “The arrangements for BNPL have become increasingly popular with both merchants and customers. Such widespread adoption has led to increasing regulatory scrutiny, although in some jurisdictions self-regulation through industry codes have been the preferred route,” law firm Norton Rose Fulbright noted in a December 2022 paper on BNPL regulation around the world. “Regulators are concerned that consumers may not fully understand the implications of entering into a BNPL scheme.”

The US’ Office of the Comptroller of the Currency (OCC), for instance, issued guidance on December 6 to national banks and federal savings associations to address risks associated with BNPL loans. The guidance noted that banks should maintain underwriting, repayment terms, pricing and safeguards that “minimise adverse customer outcomes”. Marketing materials and disclosures related to BNPL should be “clear and conspicuous”, the OCC also recommended. “Supporting a fair and inclusive financial system is a priority for the OCC and is critical to maintaining trust in the banking system,” said the acting comptroller of the currency, Michael J. Hsu. “As the buy-now-pay-later market grows, and we enter the holiday shopping season, the guidance confirms our expectation that OCC-supervised institutions offering these products do so in a responsible manner.”

Two weeks later, US senators Sherrod Brown (chairman of the Senate Committee on Banking, Housing, and Urban Affairs), Raphael Warnock and John Fetterman wrote a letter to the director of the CFPB, Rohit Chopra, urging him to monitor the risks posed by BNPL products, particularly given the tendency for consumers to use them more during the holiday season. “While BNPL might provide some consumers with helpful flexibility, it also presents new risks that the CFPB should continue to monitor and guard against, especially in light of the significant increase in the use of BNPL during the holiday season,” the senators wrote. “The CFPB must ensure that BNPL does not become a method to take advantage of struggling consumers.”

The UK Government, meanwhile, has proposed expanding its regulatory powers to cover BNPL firms that are not regulated at present to ensure BNPL products are affordable for consumers and that firms offer suitable forbearance to those in financial difficulty. The FCA has also warned BNPL firms PayPal and QVC about misleading advertisements that may harm customers due to the nature of the wording of some contract terms. “As a result of the FCA’s continued focus in this area, both firms have voluntarily made their continuous payment authority terms easier to understand—and PayPal has made terms relating to what happens when a consumer cancels the purchase funded by the loan clearer and fairer,” the FCA confirmed in a statement.

Thanks to a surge in BNPL interest in the United Arab Emirates (UAE), the Central Bank of the United Arab Emirates introduced its Finance Companies Regulation in September 2023. “The surge in customer demand has led to the rapid growth of BNPL companies in the Middle East, who have increasing requirements for external funding to enable them to meet customer demand and continue to expand their BNPL businesses,” according to law firm White & Case, which has carried out extensive work in the field concerning BNPL regulation in West Asia. “This has created new opportunities for investment in the region using novel ways for businesses to monetize the receivables arising from BNPL products.”

The new regulation formally recognises BNPL schemes as a form of consumer short-term credit, which is granted to a borrower for a maximum period of 12 months and for which specific rules for consumer protection apply. The New York-based White & Case law firm stated that the new law marked “a positive step towards establishing a robust regulatory framework for the previously unregulated BNPL space in the UAE”, particularly due to its focus on consumer protection as well as promoting “a stable and well-regulated” financial sector.


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