As the U.S.'s uncertain economic climate continues to shift consumer spending, how will the uber-successful 'buy now, pay later' platforms prevail in the face of waning investor support, impending regulations, and more?
We spent much of 2022 keeping tabs on the ballooning buy now, pay later (BNPL) market that has taken the payment systems space by storm, watching it bring flexible spending options to more than 28 million new users last year. This modern version of layaway gives instant gratification by offering interest-free payment plans for purchases on everything from socks to sporting event tickets. But as the use of BNPL became more widespread and neobanks entered the market, the legal landscape of this burgeoning industry has begun to take shape.
With the utilization of these platforms fluctuating as the economy continues to slow, many regulators and fintech purveyors have taken notice of the need for regulatory oversight. It is now more important than ever to implement consumer protection regulations and begin preparing for potential disputes associated with M&As, licensing, and more. In fact, some of the major players in the space have already been involved in disputes over issues involving consumer protections; Klarna has been hit with multiple class actions after plaintiffs claimed that the app had deceived users, and Afterpay was met with a complaint over misleading statements regarding fees.
Whatever the reason, disputes in this space are undoubtedly going to continue as the U.S.'s uncertain economic climate continues to shift consumer spending. Let's look at where weaknesses in the industry lie, what regulations may be in the future, and how experts can help prepare you for potential fallout.
The Good, Bad, and Ugly of the BNPL Market in 2023
BNPL has grown into its own sector of the fintech space as the global industry received an almost $180 billion valuation before the end of 2022. Its consumer base has similarly exploded, boasting 360 million users last year with a projected 150% spike by 2027 that will inflate the number of users to 900 million users.
But despite the industry's explosive growth stemming from the pandemic era, the market's biggest players aren't actually cashing in on its popularity. Klarna, one of the most well-known BNPL providers, hasn't been profitable since its inception, while Afterpay and Affirm have yet to turn a profit at all. Nevertheless, the companies are still raking in consumers' cash, and expanding out of just clothing and into new verticals like travel, grocery, rent, and in-person spending.
Now that more traditional payments market players are taking note of consumers' BNPL interest, they are attempting to break into the market with their own systems. American Express, Paypal, and more have already created proprietary BNPL platforms, and Apple is even getting in on the action with their pay later service set to launch this spring. And when these new providers enter the market, there is going to come a point where the market is oversaturated, forcing these companies to consolidate or completely dissolve. This leaves the industry vulnerable to a myriad of disputes, specifically surrounding M&As, theft of trade secrets, and class actions from consumers holding debt with the failing company.
Protections and Regulations to Come
When it comes to BNPL regulation, most of the conversation is centered around consumer protection efforts (or lack thereof). Multiple institutions, including the Consumer Financial Protection Bureau (CFPB), have criticized the market's lack of standardized disclosure, data collection processes, and the absence of loan stacking prevention systems. It has been argued that these platforms are difficult for consumers to navigate, baiting them into a risky lending system full of late fees and ongoing debt. The FTC has even released its own statement alongside the CFPB's, highlighting three principles for BNPL providers to remember:
- Claims must be true for the typical consumer. Meaning misrepresentations regarding the cost of a product or the terms of the transaction, including associated fees, are deceptive and violate the FTC Act. The FTC explained that "A company's claim that its payment plan is "zero cost" may be deceptive if the typical customer will, in fact, incur fees."
- consider the consumer's understanding, not just the sales conversion.
- Merchants do not shield BNPL companies from liability, As the FTC says, "When retailers and BNPL companies offer payment plans to consumers, both may be held liable when people are deceived or treated unfairly."
Further, BNPL platforms do not perform hard credit checks, nor do they hand over users' data to credit reporting agencies. This can create perpetual cycles of bad lending and financial planning as Marco Di Maggio, a Harvard economist, explained that even if you use BNPL and pay on time, "you have thousands of dollars of debt on your balance sheet that nobody knows about." He recently conducted a study that found that those who borrow from BNPL fintechs and look as creditworthy as their traditional banking counterparts on paper are much more likely to be delinquent on 'pay later' installments. In fact, delinquency rates on BNPL purchases are now outpacing those of credit cards, and BNPL firms are having their valuations slashed as investors pull back funds. It is expected that this year, new directives will require in-depth credit checks on consumers. Apple is already ahead of the curve as they just announced that they would look into consumers' history with Apple itself, with regard to past purchases and even current devices.
How to Prepare for the Future Landscape
In order to keep up with this evolving market, it is important for counsel to have a well-informed strategy in place to stay ahead of the curve when it comes to potential litigation concerning BNPL clients. With the help of a diverse team of experts, you can enhance your knowledge and create a more favorable litigation outcome. First, counsel should make note of the applicable laws, rules, and regulations for their client's operational jurisdictions as some guidance varies by region. Next, counsel should advise clients to begin implementing some sort of credit vetting system- and do so before it becomes a market requirement, and they are left playing catch up.
BNPL providers also need to pay close attention to consumer protection concerns, mainly those regarding more complicated return processes, billing errors, and transaction disputes. By providing clear disclosures and offering the extension of credit card protection rights to BNPL users, providers can get ahead of potential complaints by offering more thorough operational support. In fact, dispute resolution was highlighted by the CFPB as the most common complaint category for BNPL platforms; without protections like those that apply under Regulation Z, class actions and mass arbitrations may be in BNPL providers' futures. And this litigation trend has some law firms already launching their own practice areas focusing on BNPL arbitration to help consumers settle complaints over bad service, billing complaints, and more.
Overall, the CFPB will continue to intently monitor the operations of these payment systems and will likely release regulatory guidance sometime this year. In the meantime, engaging with subject matter experts can help prepare you and your BNPL clients for conflicts likely to ensue in the space.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.