BNPL products are not credit cards. They require tailored regulations.

Przemek Klos/Adobe Stock

As the head of policy at Klarna, I've watched closely as the landscape of consumer finance undergoes a profound transformation. Credit cards, long revered for their convenience and the potential to build credit history, are increasingly revealing a darker side: significant financial risks, especially for the substantial portion of Americans who carry a balance and end up paying revolving interest.

New research has found that nearly half of American credit card users carry a balance from month to month, with 58% of these users — approximately 56 million people — having revolved their balances for at least one year. In 2022 alone, U.S. consumers paid a hefty $105 billion in credit card interest — enough to wipe out medical debt for every American or shelter every homeless person in the U.S. These harmful trends are largely driven by high-interest rates and revolving interest, trapping consumers in a relentless cycle of debt.

Meanwhile, the buy now/pay later industry, projected to reach a valuation of over $744 billion with over 900 million users by 2027, is rapidly emerging as a preferred payment choice for consumers around the world. BNPL's allure is in its offer of 0% interest credit. These are controlled, short-term structured repayments.

The call for regulation in the BNPL sphere in the U.S. among regulators and lawmakers is loud and clear, and rightly so. But many are quick to assume BNPL should fit into an existing credit card regulatory scheme. The stark distinctions between traditional credit cards and BNPL presents a critical regulatory question: Why should credit cards and BNPL adhere to the same regulatory framework when BNPL is structured very differently and in such a way that poses a significantly lower risk to consumers?

BNPL products should be regulated proportionately to the risk they pose to consumers. In the Consumer Financial Protection Bureau's "Buy Now, Pay Later: Market Trends and Consumer Impacts" report, the CFPB recognized the clear benefits of BNPL products over credit cards.

In the U.K. and Australia, regulators have called for a bespoke regulatory regime for BNPL instead of fitting BNPL into existing credit card rules. U.S. regulators should take this approach as well.

Recently, New York Governor Kathy Hochul called for regulation of BNPL and I certainly agree with this. There should be high standards across the industry. But not all BNPL providers provide the same transparent services — some BNPL providers charge excessive fees and some charge interest.

Regulation and compliance

OCC issues guidance on managing risks of buy now/pay later

The OCC advises banks to implement robust risk management strategies for BNPL lending, emphasizing transparent loan terms, fraud mitigation and compliance with consumer protection laws.

By Ebrima Santos Sanneh

December 6

Therefore, in addition to creating bespoke regulation, the CFPB should use one of the tools at its disposal and undergo larger participant rulemaking for BNPL. This process will provide the CFPB with a complete picture of all the big BNPL companies in the U.S., so they can properly understand and address any risks to consumers. It will also let consumers and others have a say and ensure their voices are heard.

While some BNPL products are currently regulated under Regulation Z, what should be done about the non-Reg Z regulated products? They should be regulated using a bespoke framework, so here's a start:

First and foremost, BNPL should be clearly defined as a short-term, interest-free credit option, where the total purchase price is repaid in four or fewer installments. BNPL offerings should come with transparent terms and conditions that are fair, clear, easily understandable and written in plain language. Moreover, it's essential to have mandatory repayment and fee disclosures detailing the total cost of purchase, each payment amount, payment schedules and any potential fees before a consumer commits to using a BNPL product.

To protect consumers from financial hardships and the dangers of loan stacking, BNPL providers should not offer new services to consumers with existing delinquent payments. In addition, effective and timely complaint handling by BNPL providers is another critical element, alongside strict guidelines around data transparency, ensuring that consumer financial data is not exchanged for cash and that the type of collected data is clear to consumers.

Furthermore, there is an urgent need for innovation in credit reporting, with credit scoring systems reformed to accurately reflect the short-term nature of BNPL products. The current models used by credit reporting agencies are outdated and often fail to accurately reflect the short-term nature of BNPL products. This inadequacy can lead to situations where, even if a consumer repays on time using BNPL, it might inadvertently harm their credit score. Accelerating the development of more responsive and inclusive credit reporting systems is essential to align with the evolving nature of consumer credit products like BNPL.

A full overview of our recommendations for U.S. BNPL guidelines is available here.

As credit card debt in the U.S. tops $1 trillion amid rising economic concerns, consumers will continue turning to no to low-cost credit options like BNPL. The government must act to protect all consumers and demand high standards and transparency from all BNPL companies, while creating regulations fit for the product.