Hunton Retail Law Resource

One of the biggest recent trends in retail may be slowing down.

“Buy now, pay later” (“BNPL”) companies have exploded in popularity over the past year, largely through integration into retailers’ online checkout platforms. Often presented during checkout next to traditional payment methods like credit and debit cards, BNPL companies invite consumers to make purchases over a few payments with zero interest. There are, however, fees for missed payments, late payments, or payments rejected for insufficient funds. Moreover, BNPL offerings may occupy a gray zone apart from typical credit transactions or loans which could exempt them from all sorts of laws and regulations.

The past few months have brought new regulatory attention to the BNPL industry. Last month, the Consumer Financial Protection Bureau issued demands to five BNPL companies. According to its press release, the CFPB is seeking information about “consumer debt accumulation, regulatory arbitrage, and data harvesting.” Interestingly, the CFPB also shared that it is “working with its international partners in Australia, Sweden and the UK.” The UK, notably, has strictly regulated BNPL companies.

Also, survey evidence suggests that about a third of all BNPL users miss one or more payments. Retailers do not share in the default risk, but high default rates may call into question the long-term business viability of BNPL as a whole. With federal regulators investigating, limits on fees and late payment penalties could be applied to BNPL transactions. The risk to the industry, then, becomes clear: high default losses on the one hand coupled with regulatory limits on the ability to recoup those losses on the other. This puts BNPL providers in an uncomfortable position, with a need to look elsewhere for revenue and only two apparent options: fees to consumers or increased costs to retailers.

Yet, regulatory pressure is not all. Two BNPL providers are on the receiving end of putative class actions filed in Connecticut and California. It is also too early to see what burdens on the industry may develop as credit reporting agencies plan to add BNPL transactions to consumers’ credit reports. And, as the potential start of a trend, California considers BNPL transactions to be loans subject to state financing law.

All of this points to potential challenges for BNPL providers. BNPL’s recent success relies, in part, on its embrace by retailers, especially in the context of online shopping. Retailers should not necessarily avoid or distance themselves from BNPL companies, but retailers should evaluate their own practices and relationship with BNPL to make sure that if the shots really do start flying—from the CFPB, civil suits, or elsewhere—retailers’ houses are in order. It’s hard to imagine that a meaningful inquiry into BNPL would not affect retailers in some manner, but with proper preparation, the risks appear manageable.