Introduction
On June 6, 2022, Apple unveiled plans to introduce “Apple Pay Later” in its latest iteration of iOS,
joining a growing number of companies hoping to capitalize on the tide of Buy Now, Pay Later (BNPL) taking the consumer finance industry by storm.
The announcement is emblematic of the dramatic growth of BNPL, a class of largely unregulated fintech
installment loans enabling consumers to finance purchases by dividing payments into a series of interest-free installments.
While BNPL has been available in the United States since at least 2012,
the industry underwent an exponential increase in popularity in the aftermath of the COVID-19 pandemic:
The number of BNPL users in the United States doubled to 50.6 million from 2020 to 2021,
and global BNPL spending is estimated to increase nearly 300% from 2022 to 2027.
BNPL’s unprecedented growth has forced regulators across the globe to grapple with the industry’s evasive legal structure and the risks it poses to consumers.
While installment loans are hardly new,
BNPL presents novel risks because it is primarily marketed to consumers as an interest-free alternative to traditional credit offerings like credit cards.
This interest-free structure is reflected in BNPL’s distinctive profit model: Rather than relying on interest payments from consumers, BNPL lenders generate revenue by charging merchants fees on BNPL-financed trans-actions.
BNPL lenders advertise this arrangement to merchants as a way to increase sales and conversions, and consequently, lenders’ revenue streams depend on forming partnerships with merchants.
Thus, in addition to being a form of consumer credit, BNPL plays a secondary role as a marketing tool that merchants use to drive sales.
This unique market dynamic creates incentives for both BNPL lenders and their partnering merchants to encourage consumers to increase their spending with BNPL.
This has led to concerns that BNPL may impair consumers’ financial health by promoting overspending and impulsive buying.
These risks are compounded by lenders’ tendency to represent BNPL as a sensible budgeting tool rather than properly describing it as a form of credit.
Although the consumer risks accompanying the failure to regulate BNPL have garnered significant academic attention internationally,
there is currently a gap in the literature regarding regulatory considerations in the American context. This gap is important in light of the unique features of the American regulatory scheme, which has been largely constructed through intermittent, politically polarized responses to regulatory crises
and has only recently consolidated consumer financial protection into a single federal agency.
Moreover, the outsized role of nonfinancial partnering merchants in promoting BNPL to consumers calls into question the efficacy of extending existing financial regulations—which have historically focused on financial and depository entities
—solely to BNPL lenders.
Against this backdrop, on September 15, 2022, the CFPB issued its long-anticipated report on the industry,
announcing that it was looking into extending existing credit card regulations to BNPL lenders.
While this development certainly signals an improvement over not regulating lenders at all, this Note argues that the analogy to credit cards is fundamentally flawed because existing credit card regulations—which largely rely on disclosure requirements
—would fail to account for the crucial role that merchants play in driving the industry
and the fact that many consumers do not even view BNPL as credit.
Moreover, by focusing on the similarities between BNPL and traditional credit products, this approach risks failing to keep up with the industry’s rapidly evolving landscape, characterized by market activities that frequently elude traditional legal classifications.
This Note contributes to the literature of consumer finance law by describing the deficiencies in existing regulatory approaches and proposing a novel framework for the regulation of nonfinancial market participants. Part I provides an overview of the BNPL industry and contextualizes regulatory considerations by tracing the historical evolution of federal consumer protection law through the creation of the CFPB. Part II describes the risks that unregulated BNPL products pose to consumers and argues that the CFPB’s proposal to extend existing credit card regulations to BNPL lenders is unlikely to sufficiently respond to these risks. Part III explains the important function that regulating merchants can have in creating a comprehensive regulatory scheme for BNPL and addresses some challenges in constructing such a framework. The Note concludes by proposing a framework for regulating representations and activities undertaken by merchants offering BNPL to customers under the CFPB’s statutory authority to proscribe unfair, deceptive, or abusive acts or practices (UDAAPs) under the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank).