Addressing buy now pay later risks effectively

How to sustain growth and compliance in BNPL business model?

Buy now, pay later (BNPL) business model is a new spin on installment lending. It allows consumers to take instant possession of a purchase, with or without a down payment. And most BNPL loans are set up to require four payments. However, this type of lending presents a unique set of risks and challenges. In this article, we explore buy now pay later risks, BNPL as a product, the current market, regulatory interest, and potential challenges.

Buy now, pay later business model thrives

While credit utilization was down and consumer spending was up, e-commerce sales in North America for 2021 totaled $870 billion, and buy now, pay later (BNPL) accounted for approximately $33 billion of that amount, or 3.8%, which is up from 1.6% the year prior. By 2025, it is expected that the dozens of BNPL firms competing in the US market will represent 9% of the share of e-commerce, a value of nearly $180 billion.

Is consumers’ understanding lagging market growth?

Despite buy now, pay later business model gaining a momentum, a study by Qualtrics on behalf of Credit Karma found that 34% of those who have used BNPL have fallen behind on one or more payments. And with multiple BNPL providers offering their loans at the point of sale, it can be easy for consumers to take on debt, as each provider has different repayment terms, and without a dashboard providing the full picture, consumers can accumulate debt quickly.

Prepare for regulatory changes

There is an increasing need from customers to address buy now pay later risks. Over time, balanced regulations are likely to follow and lead to products in the BNPL space that are financially inclusive and adhere to consumer protection regulations. The Consumer Financial Protection Bureau (CFPB) is seeking to understand it better by issuing market-monitoring inquiry and inviting public comment. It is highly likely that the agency’s monitoring and collections will be followed by enhanced or product-specific regulation.

The US market’s regulatory landscape

The existing federal regulatory framework in the US, along with fragmented state requirements, presents opportunities and challenges for BNPL providers. State laws address BNPL loans in a variety of ways, creating a wide variety of obligations for BNPL providers to grapple with as they target consumers across the country. Depending on the state, and how a provider has structured its product, it may be subject to state requirements for licensing, loan terms, disclosures, and servicing.

The way forward: Challenges to face and actions to take

Despite being an attractive market, there are both existing and potential future challenges that will test providers’ adaptability. They should be mindful of the following regulatory, economic, and operational considerations appearing on the horizon within the next 12 months:

With these challenges within view, BNPL providers may want to focus on:

  • Creating an inventory of applicable laws, rules, regulations, and guidance for the jurisdictions they would be operating within
  • Mapping applicable laws and regulations to the product life cycle, including the marketing and pre-underwriting stage, as well as underwriting, funding, servicing, and collections stages
  • Defining operational procedures for the product life cycle
  • Creating a regulatory strategy that allows for the growth of your risk management and compliance programs as your BNPL portfolio grows
  • Enhancing second-line compliance testing and assurance by independent audit

Deloitte is closely monitoring any developments as the BNPL market continues to grow and attract regulatory scrutiny, including new rulemaking and guidance. Download our report to learn more.

Get in touch

James Siciliano
Managing Director | Deloitte & Touche LLP

John Graetz
Principal | Deloitte & Touche LLP

Gina Primeaux
Principal | Deloitte & Touche LLP

Monica Nguon
Senior Manager | Deloitte & Touche LLP

Deloitte Center for Regulatory Strategy

Irena Gecas-McCarthy
Principal | Deloitte & Touche LLP

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