Recently, the CFPB released a report outlining the challenges and risks inherent in the rapid evolution of the payment ecosystem, with a particular focus on emerging uses cases involving "super apps," buy now, pay later (BNPL), and embedded payments, as well as their implications for consumers. The report notes that these changes create more opportunities for companies to aggregate and monetize consumer financial data, and for large players to dominate consumers' financial and commercial lives.
- Super Apps. More widespread overseas, super apps combine several services into a single smart phone app, providing users "with nearly every capability needed to conduct their online life, essentially, 'the internet in an app.'" The report acknowledges that super apps are unlikely to get traction in the U.S. because "the U.S. market is developing differently." More prevalent in the U.S. are "bank in an app" models that provide a wide array of financial, payment and commerce functions within a single app in order to add value and retain the user. Despite their advantages, the report warns that super apps may limit consumer product and service choice, creating the potential for providers to steer consumers to specific solutions and/or limit access to some products.
- BNPL products are "a form of unsecured short-term credit that allows consumers to split purchases into four equal interest-free installments at the point of sale, with the first installment due at checkout" (we discussed BNPL in previous blog posts here, here, and here). The report tracks the progression of the BNPL 1.0 version described above to a 2.0 version that has "pivoted to a 'lead generation' business model" where providers are "driving consumer traffic directly through their own apps and monetizing that traffic by charging referral (or affiliate) fees to merchants." In some cases, the referral fees that a merchant pays to the provider may exceed 10% of the transaction amount.
- Embedded Commerce. Embedded commerce "enables shopping to occur directly on the website or app of a social media feed rather than via traditional ad-based links to a retailer's own site." The report notes that "[e]mbedded commerce may make it easier for a consumer to be defrauded by an illegitimate merchant or unintentionally commit to a subscription that results in ongoing payments."
Finally, the report concludes with areas of focus for the Bureau: (i) proposing a rule to implement Section 1033 "to give consumers greater control of their financial data, including their payments and transaction data;" (ii) issuing a report on its findings from its BNPL monitoring orders and "will determine whether regulatory interventions are appropriate"; and (iii) seeking to mitigate the potential consequences of big tech firms moving into the real-time payments space.
Putting It Into Practice: This recent report is in a long line of aggressive and active guidance from CFPB looking to focus on big tech's involvement in the payments space. It is prudent for BNPL providers to understand the regulatory implications so they can be prepared for any potential regulatory inquiries, exams, or investigations.
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