Don't regulate buy now/pay later companies like traditional lenders

Over the past year, leaders in the buy now/pay later sector have worked with the Consumer Financial Protection Bureau to identify strengths, risks, and potential areas for regulatory improvement in the industry, culminating in their release of the highly anticipated "Buy Now, Pay Later: Market Trends and Consumer Impacts" report last month. Now, as the agency considers its next steps, we as BNPL leaders must caution it against conflating the innovative, interest-free BNPL industry with the likes of traditional high-cost forms of credit, and regulating us as such.

Consumer protection regulations are essential to healthy markets, and I strongly welcome and support efforts to proportionately regulate the burgeoning buy now/pay later payments industry. However, in my experience from around the globe, an overly prescriptive regulatory regime will stifle progress for potentially impactful new business models emerging in the financial technology sector, ultimately leading to fewer choices for consumers and less competition for the largest companies. This is particularly true in the credit markets, where tick-the-box regulatory approaches tend to result in more of the same old high-interest credit schemes with consumer debt-driven companies reigning supreme.

There's much at stake here, particularly in rough economic times. Rising interest rates and inflation persistently highlight consumers' need for lower-cost credit options. Average credit card interest rates in the U.S. recently rose above 18% — a 26-year high — as lenders responded to hikes by the Federal Reserve. And as the cost of living steadily increases, many underbanked consumers who lack access to traditional credit opportunities are finding it harder to manage short-term cash flows when buying items they need. This includes purchases made necessary by unexpected life events, like a broken phone or TV, as well as investments in higher-quality items that last longer.

These are just a few reasons why there has been a significant shift in consumer demand from traditional high-cost credit cards to low-cost, interest-free BNPL — a service that allows users to spread payments over four installments, without charging interest or leaning heavily on consumer fees. The rapid growth of the BNPL sector in the U.S. — highlighted in the CFPB's recent report — further underscores the shift that we're seeing among consumers who are turning away from the greed-fueled practices of old banks and high-cost credit cards towards flexible and better-value payment methods.

Of course, with growth comes the need for regulatory guardrails to ensure consumer safety. While the BNPL industry has long been covered by a range of existing federal and state lending laws — including those governing money laundering, electronic transfers, consumer privacy, and laws that bar unfair, deceptive or abusive acts or practices — American consumers will undoubtedly be better off with clearer federal regulatory guidelines. But any new regulation or guidance should recognize the lower level of risk inherent to BNPL services and refrain from adopting a heavy-handed, disproportionate approach that treats all forms of consumer credit equally, regardless of risk or cost.

Credit cards and high-interest advance payment schemes have long worked within federal regulations to keep consumers in a vicious cycle of debt through continuous interest charges, rollovers and high credit limits. They've blurred the true costs of their products, pushing consumers into revolving debt cycles that take years to pay off. BNPL providers offer consumers short-term flexibility with an upfront six-to-eight-week structured payment plan designed to increase consumer access to extremely low-cost credit while ensuring true clarity on a product's final cost. BNPL is fundamentally different from traditional credit and regulators should view it as such.

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As Congress and the CFPB develop appropriate guidelines, they mustn't be tempted to simply adopt prescriptive, check-the-box compliance requirements. Prescriptive regulation encourages lenders to focus on doing the bare minimum to comply, and does not motivate firms to prioritize improving the customer experience. Doing so will only lead to poor consumer outcomes, increasing costs for new market entrants and suppressed competition.

U.S. policymakers have a rare opportunity to adopt a more forward-looking, regulatory approach to BNPL — one of the fastest-growing e-commerce payment methods — that can meet consumer needs while keeping pace with the rapidly evolving financial technology landscape. Ideally, that would include a consumer-focused, outcomes-based approach that specifies the desired positive result that a rule intends to achieve, rather than describing a specific process or action that must be followed to achieve compliance.

In collaboration with Congress, the CFPB and other stakeholders, leaders in the BNPL space will work together to develop industry guardrails that promote mobility and choice, regulate outcomes and are proportional to risk.