PerformLine recently hosted a roundtable for Buy Now, Pay Later (BNPL) industry leaders to discuss the industry’s evolution as the CFPB continues to sharpen its focus on this payment method and regulators assess the impact to consumers. Rhonda McGill, Director of Client Solutions at PerformLine was joined by a former examiner from the CFPB Office of Supervision, Enforcement and Fair Lending. This blog contains a summary of the questions that were asked during the event and our guest’s responses.
Q: The CFPB recently issued a consent order around point of sale financing activities without authorization from consumers. What implications does this carry for the industry as a whole?
A: The most obvious takeaway is that the CFPB is now squarely looking at the BNPL space. The CFPB has been studying this space and quietly reaching out to a lot of providers for the past year and just gathering information about the market. We've received inquiries from the CFPB’s Office of Research, Markets, and Regulations and the comments and questions have been fairly benign, because they're really tasked with studying the market and not with finding violations. However, those market studies do inform the CFPB’s enforcement priorities and examination priorities.
In a blog post that came out shortly after the enforcement action, the CFPB cited that close to half of all US consumers have used a BNPL product. With that, they’ve likely received a lot of complaints and are looking at what the issues are and starting with this consent order, we're going to probably see more to come from the CFPB as well as other state regulators.
The cause of action focused around the lack of authorization by consumers. While most BNPL providers are consumer-facing platforms, this consent order raises the broader question of something the CFPB has always looked at which is — does the consumer know what they're getting into? Are the terms clear and conspicuous to the consumer? That becomes exceedingly difficult in our day of mobile applications and trying to put TILA disclosures in loan agreements. Questions we are asked a lot surround the visibility of these details such as: Does this hyperlink do the trick? Do we need a check box? Do we need more affirmative consent from the consumer? What else do we need to call out on the screen if we’re not showing the whole loan agreement up front?
Thus moving forward, the CFPB is going to be focused on this and similar UDAAP (Unfair and Deceptive Acts and Practices) issues, and it's going to be paramount that the consumers understand how your products work.
Q: There is a lot of activity taking place in the acquisition environment with a lot of BNPL firms. Can you speak to the importance of regulatory due diligence for potential investors during these processes?
A: We talk a lot about how compliance is driven by regulation and regulators - but what I actually see in practice when working on mergers and acquisitions (M&A) and financing deals in the fintech space is that compliance is more often driven by investors. Investors don't want to buy something that they're going to have to sink a lot of money into to make it more compliant. A lot of startup companies will be limited in resources for what they can do to beef up their compliance, what licenses they can get, how robust their policies and procedures can be, and how many people they can hire to do their compliance. Investors know that as soon as they sink money into the business, the business is going to pour a lot into the growth, and with that comes a bigger target on your back, and bigger potential liability from regulatory action class actions and other litigation. With the M&A pace and the pace of investments, those risks just become greater, and it's seen as a big cost center to invest in or buy something that needs a lot of work in the compliance department.
A bigger issue is if a product has been built without enough compliance in mind, which would require changes to be made to the fundamental aspects of the product, and it may impact where that product can continue to be offered in some of the jurisdictions where the company operates. All this can be a large negative to investors. We've seen deals where the investors have required hold back information to indemnify the buyers and if there's an issue the sellers will be held responsible for those failures if it's part of the indemnity. We’re also seeing closing conditions to obtain certain licenses or to beef up certain policies, so this is definitely something that's on investors' minds.
We most commonly see this with institutional investors like other financial service providers that may have a bank charter of their own or they have their own regulators to deal with, it's perhaps less of an issue with investors that are not regulated entities but we are increasingly being called in to do regulatory diligence for those folks as well.
Q: Credit card companies are now entering the BNPL space at a faster pace, can you speak to how this impacts the industry as it relates to regulation?
A: It’s no surprise that major credit card companies and banks want a piece of this pie since it's been such a success. The credit card companies have a unique advantage as well as a disadvantage of getting into this space.
Their advantage is that they have somebody who's a credit card holder currently and they have a complete picture into their transactions and spending habits. Thus they have the ability, because they're processing those transactions, to theoretically finance any of those purchases with a split pay transaction. That's not an advantage that a lot of non-bank companies or non-issuing card bank companies have, because in that case, the providers are going out to make partnership deals with every merchant that will accept their product, whereas the credit card is accepted everywhere. So, the banks and credit card companies have a unique advantage of just being able to finance that many more transactions.
They also have the benefit of being a credit card bank—they can make loans at an interest rate that non-banks can't make loans at. They have exemptions from state laws on usury and consumer lending, and so their regulatory burdens are lower. Of course, they have plenty of credit card and banking regulations, but on the BNPL product it's a little bit less complex to offer if you're a bank. Of course there's many non-banks that do partnerships with banks and can avail themselves of that exemption as well, but that's an additional step for the non-bank to get into.
The disadvantage that credit card companies have, which might be an interesting niche for the non-bank companies, is that to be a credit card holder in the first place you have to have decent credit. The credit card companies may not be reaching all sectors of the population that's most likely to use buy now pay later products. A lot of these products were originally intended to substitute for credit cards, or to provide credit to people who either couldn't get a credit card, had maxed out their limit, or didn't want to pay credit card interest. The credit card model does reach a lot of people, but it also misses a lot of people as well who are less banked or are a little bit underbanked.