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.

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