The impact of changing US regulations on B2B BNPL
Businesses have become used to utilising traditional extended payment terms. Those that are cash poor may depend heavily on the 30, 60 or even 90-day payment windows that they are often granted by suppliers.
But business financing is changing and many companies are now turning to buy-now-pay-later (BNPL) as an alternative method. How is the rise of BNPL affecting B2B finance - and will new regulations in the US impact how it will be used in the future?
What is BNPL?
BNPL services allow users to split purchase payments into instalments – typically into four equal payments over several weeks.
A huge increase in online shopping during the pandemic has helped boost the growth in BNPL with consumers, with a 970% rise in US loans by the five main BNPL lenders between 2019-2021, and predictions that BNPL e-commerce transactions will surpass $3tn by 2030.
In the business world, there has been a slightly slower adoption of BNPL. But a widening trade finance gap – the global trade finance gap reached an all-time high of $1.7tn in 2020 – is putting a renewed focus on B2B BNPL.
Proponents say it offers a more flexible finance option and promises collateral-free, short-term credit. It may also solve the problem of access to supply chain finance, shifting default risk away from sellers, and improving credit decision making with real-time transaction data.
Alongside an accelerated growth in B2B e-commerce – the sector is expected to reach $25.65tn by 2028 – it brings B2B finance firmly into the digital space.
How is BNPL regulated?
Some states within the US have responded to the rise in BNPL and cash advances with regulations and extended oversight, often dependent on whether BNPL is considered as consumer credit.
New York and California for instance, have passed laws requiring more disclosures on advances, with California classifying BNPL as loans, bringing companies that offer them under the state’s lending rules.
But a more coordinated approach is on the cards. The US Consumer Financial Protection Bureau (CFPB) will soon be extending its reach into the BNPL space.
Changes to BNPL regulations
CFPB director Rohit Chopra, told reporters in September: "In the US, we have generally had a separation between banking and commerce. But as Big Tech-style business practices are adopted in the payments and financial services arena, that separation can go out the door.
“It is critical that this growing category does not hide in the shadows.”
Part of this more joined-up practice will involve the CFPB issuing guidance or regulations to align BNPL sector standards with those of credit card companies.
In an 83-page report on BNPL market trends and consumer impacts, the CFPB identifies several competitive benefits of BNPL loans over legacy credit products that are both financial and operational:
- No interest and sometimes no late fees – lower costs for consumers
- Easy to access
- Simple repayment structure
However, it also warns that BNPL products pose several potential consumer risks, with three broad areas of concern:
- Discrete consumer harms – lack of clear disclosures of loan terms, challenges in filing and resolving disputes, and a requirement to use autopay for all loan payments.
- Data harvesting – consumer data collected to increase likelihood of incremental sales and maximise lifetime value of borrower.
- Overextension – may encourage loan stacking (taking out several loans from different lenders) and sustained usage.
The CFPB’s next steps include:
- BNPL firms to adhere to many of the baseline protections already established for credit cards.
- Curtailing of data surveillance practices that BNPL providers engage in – specifically demographic, transactional and behavioural data collected.
- Asking industry and consumer reporting companies to develop appropriate and accurate credit reporting practices.
- BNPL firms to be subject to appropriate supervisory exams in line with credit card companies.
How does this affect B2B BNPL?
Business lending in the US faces fewer regulatory restrictions than its consumer-focused cousin. It is exempt from most state usury laws and the Truth in Lending Act – requiring certain levels of transparency in lending – is geared towards consumer credit.
However, while the CFPB report does not differentiate between B2C and B2B use of BNPL, the new guidance shows that the BNPL sector is now firmly on the regulatory radar – and additional oversight cannot be far behind.
Other countries are already starting to increase their supervision of BNPL firms and products. In the UK for example, there are plans for the Financial Conduct Authority (FCA) to regulate BNPL agreements and other forms of short-term interest-free credit. Though this may not come into force until 2024, in August 2022 the FCA sent open letters to BNPL firms telling them to review their financial promotions agreements.
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