Rather than slowing growth in the BNPL sector, regulatory scrutiny will help it grow up by shutting out smaller lenders, boosting the industry’s reputation and integrating it into the credit reporting system.
that it was opening an inquiry into BNPL understandably created a stir. After all, most major forms of consumer lending in the U.S. are regulated by one or more federal and/or state laws. Traditional bank loans are regulated by the federal Truth In Lending Act , dating back to 1968. The CARD Act, passed by Congress in 2009, places additional limits on credit card providers’ advertising and lending practices.
Most BNPL plans aren’t regulated by TILA because they bill users in four installments, falling just below the five-installment threshold where TILA kicks in. However, a patchwork of state laws require BNPL firms to secure lending licenses in the majority of U.S. states, which impose strict requirements in terms of disclosure and limiting fees and interest payments.
“I’ll be surprised if [the CFPB] comes out with a very specific BNPL regulation,” says Kim Holzel, a veteran of the CFPB who is now a partner with law firm Goodwin Procter, advising banks and fintechs. “They have rules to regulate this now if they want to. They’ve stretched [UDAAP] pretty far, so I don’t even think they need to reach rulemaking in order to regulate this space at all.
A positive consequence of heightened regulatory scrutiny could be a reputational boost for the industry’s largest players at the expense of their smaller competitors. Industry leaders like Klarna and Afterpay make well over 90% of their revenues by partnering with online merchants. These firms don’t charge customers late fees for their basic “pay in four’ plans, although they do charge fees for some of their longer-term financing plans.
However, upstart competitors who are unable to secure lucrative merchant partnership deals are left with collecting fees as their primary source of income. For example, Chillpay, founded in 2019, charges a standard
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