The explosion in Buy-Now-Pay-Later (BNPL) has caught the eyes of lawmakers and regulators, who are taking a closer look at this booming industry.

BNPL payment offers allow consumers to purchase goods or services now and pay for them over time, often through a short series of installments (for example, four payments spaced two weeks apart). Industry researchers have found that Gen Z consumers increased their use of BNPL products from 6% in 2019 to 36% in 2021. However, with this growth, lawmakers and regulators have voiced concerns about BNPL, including that consumers may easily spend more than they can afford and rack up multiple BNPL purchases with varying payment schedules and payment terms.

Read our 360 Degree Analysis of Buy-Now-Pay-Pater Products

The list of consumer protection concerns raised by lawmakers and regulators is long. Consumers may face late fees, fees for failed payments, payment rescheduling fees, early payoff fees, account reactivation fees, or other fees charged by BNPL providers that may not be readily apparent.

Many concerns rest on the assumed inability of consumers to manage their BNPL purchases due to lack of consolidated account statements, varying repayment schedules, and the lack of information and standardized disclosures about late fees and the consequences of default. Consumers who take advantage of BNPL offers may not have the ability to repay, and the lack of any substantial credit underwriting processes may result in extending credit to those consumers who are exposed to overdraft fees when BNPL payments are automatically withdrawn from bank accounts.

Whether the BNPL offering is defined as a payment service or a form of credit is important. Some lawmakers have specifically urged the Consumer Financial Protection Bureau (CFPB) to “take action” against BNPL providers that operate without oversight. In a letter sent to CFPB Director Rohit Chopra dated December 15, 2021, a group of six Democratic U.S. senators asserted that some BNPL companies deliberately structure their products to avoid consumer protection obligations under the Truth in Lending Act (TILA) or other lending laws, which apply to loans that are repayable in more than four installments or are subject to a finance charge.

Enhanced government regulation seems likely to take hold. On December 16, 2021, the CFPB issued a series of orders to five of the largest BNPL companies to gather information about industry practices and examine concerns about consumers accumulating debt under BNPL programs. The CFPB also raised concerns that BNPL lenders are engaged in “regulatory arbitrage,” such that they are not adequately evaluating consumer protection laws that apply to their products and are not providing, for example, dispute resolution procedures.

In January, the CFPB asked for the public – including consumers and merchants – to comment on their experiences with BNPL products in order to better understand how BNPL models impact the broader e-commerce and consumer credit marketplaces. The CFPB is also carefully following the steps regulators in other countries have taken with respect to BNPL, particularly in Sweden, Australia, and the United Kingdom. Sweden, for example, has issued a law requiring merchants to first present consumers with payment options that do not contribute to debt. Regulations regarding whether merchants may be able to pass along surcharges to consumers to cover the costs merchants have to pay to BNPL providers may also be at stake.

BNPL will continue to receive significant attention from lawmakers and regulators in the year ahead. Careful planning may help promote stable growth of the industry, which would enhance the benefits to business and consumers.

Read our in-depth look at Buy-Now-Pay-Later products, financing, and regulation. To learn more about Venable’s Advertising and Marketing or Consumer Financial Services practices, please subscribe to our monthly newsletters.

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Ellen T. Berge

Ellen Berge provides counsel on regulatory compliance, government investigations, contract negotiations, and general business matters. Ellen focuses on advertising, marketing practices, payment processing, and merchant services. Her clients include major brand advertisers and direct-response retailers, and lead generators, telemarketers, media agencies, software providers…

Ellen Berge provides counsel on regulatory compliance, government investigations, contract negotiations, and general business matters. Ellen focuses on advertising, marketing practices, payment processing, and merchant services. Her clients include major brand advertisers and direct-response retailers, and lead generators, telemarketers, media agencies, software providers, and others who serve them. On the merchant services side, she leads a practice that works with banks, processors, sales agents, payment facilitators, independent software vendors, and fintech and financial services businesses. Ellen also serves as the firm’s managing partner of Professional Development and Recruiting.

Andrew E. Bigart

Andrew Bigart focuses his practice on helping bank and non-bank financial institutions navigate the federal and state regulatory environment governing payments, lending, and consumer financial services. Andrew provides regulatory and business counseling advice to clients across a variety of industries, including banks, payments…

Andrew Bigart focuses his practice on helping bank and non-bank financial institutions navigate the federal and state regulatory environment governing payments, lending, and consumer financial services. Andrew provides regulatory and business counseling advice to clients across a variety of industries, including banks, payments companies, money transmitters, broker-dealers, lenders, and trade associations. He counsels clients on regulatory compliance matters, contract negotiations, due diligence, federal and state examinations, and civil investigations and litigation before federal and state banking and financial institution regulators. Andrew has been recognized by Legal 500 and named to the Electronic Transactions Association’s Forty under 40 list.

Jonathan L. Pompan

Jonathan Pompan is co-chair of the firm’s Consumer Financial Services Practice Group and Consumer Financial Protection Bureau (CFPB) Task Force. Jonathan’s practice focuses on providing comprehensive legal advice and regulatory advocacy to a broad spectrum of clients, such as nonbank financial products and…

Jonathan Pompan is co-chair of the firm’s Consumer Financial Services Practice Group and Consumer Financial Protection Bureau (CFPB) Task Force. Jonathan’s practice focuses on providing comprehensive legal advice and regulatory advocacy to a broad spectrum of clients, such as nonbank financial products and services providers, advertisers and marketers, and trade and professional associations, before the CFPB, the Federal Trade Commission (FTC), state attorneys general, and regulatory agencies. At a time when government consumer protection agencies are stepping up their scrutiny, Jonathan develops strong and lasting relationships with clients by understanding their business objectives, helping them recognize opportunities and avoid legal pitfalls.