Last week, PerformLine hosted a Buy Now, Pay Later (BNPL) industry roundtable that gathered BNPL leaders to discuss best practices for ensuring compliance and consumer protection as we continue into a year of increased regulatory attention on this evolving industry. Here’s a recap of a few key items that we discussed during the event.
We were joined by Eamonn Moran, Of Counsel at Morgan, Lewis & Bockius LLP where he regularly handles matters in the financial services industry, including those pertaining to consumer financial services, consumer protection, fair lending, the Dodd-Frank Act, regulatory compliance, and the Consumer Financial Protection Bureau (CFPB), where he previously served as counsel in the Office of Regulations.
Eamonn helps lenders, fintech and regtech companies, marketplace lending platforms, payments companies and systems, card issuers and networks, banks, investors, and other financial services providers navigate issues arising under state and federal financial services laws. Eamonn serves on the firm’s fintech, banking, and automotive and mobility industry teams, and is a co-leader of the banking industry team’s lender issues working group.
Implications of the CFPB’s Probe Into BNPL
The conversation started with a discussion on the implications of the CFPB's probe into five major BNPL providers—which was announced last December and was due on March 1st of this year—over concerns about risks to consumers associated with accumulating debt, regulatory arbitrage, and data harvesting.
In short, Eamonn explained, it’s still very early in the process of the Bureau’s work on BNPL. Shortly after the announcement of the probe, the Bureau also published a notice seeking public comment to help inform its inquiry. On top of the concerns around debt accumulation, regulatory arbitrage, and data harvesting, the Bureau is looking to better understand consumer and merchant experience with BNPL, the benefits and the risks, regulator perspectives of BNPL products, and ways the market can be improved.
Public comments were due on March 25th. Now, we’re all waiting to see what happens next. From Eamonn’s perspective, given the speed at which the BNPL industry is evolving, the CFPB could move quickly on this, with the potential to see new regulations or guidelines put in place by this year.
Eamonn also noted that Director Chopra appeared recently on CNBC where he noted that the Bureau is exploring potential regulatory gaps that need to be addressed, which could include BNPL products.
The bottom line is that something is likely to come from this, and it’s likely to come sooner rather than later. Eamonn’s advice to roundtable attendees and other BNPL professionals is:
- Understand your product, what existing regulations are applicable to your product, and focus on complying with those (such as TILA, UDAAP, FCRA, etc.)
- Take a proactive approach to compliance to be prepared for potential regulations
BNPL Loans and Credit Bureaus
There has been an increased interest of BNPL providers in formalizing a standard process for reporting BNPL tradelines with credit bureaus in the interest of helping consumers build credit.
These advancements may come as exciting news for those organizations that support the mission of increased access to credit. Eamonn spoke about a few advantages of including BNPL loans, including:
- Furnishing this data has the potential to boost scores for those who are new to credit and/or those who are working on building their credit
- On-time payment history for BNPL loans would benefit consumers with a short credit history, would demonstrate responsible payment history, and increase their credit score
- BNPL providers would get the insights they needed for responsible lending
But, just like any innovation in the consumer finance space, this doesn’t come without risks. These goals can only be achieved if compliance is managed correctly and companies take the steps to ensure that consumers don’t take on too much debt or open too many accounts.
The overall process of how BNPL transactions and usage will be reflected in credit scores is still evolving as we speak. It remains to be seen if underwriting practices change and what participation from BNPL companies will look like.
The CFPB Under Director Chopra
Since being sworn in in October 2021, CFPB Director Chopra has been very vocal about the Bureau’s intent over the next few years. Given his experience with the CFPB, we asked Eamonn what he expects to see differently under Chopra’s leadership and what other insights he could provide from the CFPB’s perspective.
Here’s what Eamonn expects:
- The Bureau to look a lot like it did under Richard Cordray, with a very robust and aggressive approach to enforcement and consumer protection
- The use of enforcement actions to set expectations (instead of publishing guidelines)
- Providing relief to consumers and small businesses who are still dealing with the effects of the pandemic
- Continued focus on racial equity initiatives
- An emphasis on consumer risks (specifically around technology and data privacy) and consumer education + engagement
Specific to BNPL, Eamonn noted that the Bureau has supervisory and enforcement tools to help standardize some practices around the industry and there is potential for the Bureau to release some guidance on disclosures given out by BNPL providers.
While there was a lot of discussion around BNPL and what the future holds, here are a few of our top takeaways.
- The current regulatory environment is increasing scrutiny towards consumer finance companies at both a federal and state level—keep an eye on regulatory changes and keep compliance programs current
- Pay close attention to UDAAP—not just for your own company, but for your retail partners as well—because all consumer finance companies fall under this consumer protection law and have regulatory obligations to comply
- Eamonn referenced a study that showed that only 55% of Gen Z buyers have a credit card, meaning that the other 45% will be looking to alternative forms of credit, like BNPL. Because of this, many companies will likely leverage text messages and social media to get in front of this audience. Make sure your marketing messages are compliant with UDAAP and other consumer protection laws across all channels
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