Navigating the uncertainty: Is the buy now, pay later bubble set to burst?

The rapid growth of Buy Now, Pay Later (BNPL) services and their increasing popularity across all demographics has created a boom in companies providing the service. ModernRetail reports that this popularity is, now, particularly noticeable among Gen X and Boomer consumers¹ - however, with potential regulatory changes on the horizon businesses may question if the bubble is about to burst. Is this really the case? Let’s discuss.

Challenges facing BNPL

The rapid growth of the BNPL market is attracting scrutiny from financial service regulators. The Consumer Financial Protection Bureau (CFPB) has expressed concerns over the risks to consumers². These concerns include a lack of standardized disclosures, accumulation of debts, high late fees, and complex refund processes.

The Wall Street Journal reports that, while the appeal of BNPL options have gone up, BNPL users were 11% more likely than non-BNPL borrowers to have a delinquency of at least 30 days on their credit records³. However, BNPL may provide enterprises with options for adapting to economic downturns.

These concerns contribute to the expected changes in BNPL regulations in a bid for stricter oversight that will boost responsible lending.

Current regulatory stance on BNPL

As stated by the Payments Association, BNPL is not at present regulated at a federal level in the US⁴. That said, many providers self-regulate to ensure transparent and responsible lending. For example, PayPal Pay in 4* provides a flexible way for consumers to pay with clear and transparent communication about how the payment method works and the schedule of repayments. Consumers can see their payment schedule upfront and are not charged any application or late fees.

At a state level, BNPL services may be subject to consumer protection laws and regulations. For example, California has incorporated BNPL products under its California Financing Law⁵. The CFPB oversees certain aspects of BNPL, focusing on fair lending practices and transparent disclosure.

Upcoming regulatory changes

The Consumer Financial Protection Bureau (CFPB) is leading the movement to tighter regulation but has yet to define a timeline for these changes to be implemented. However, it’s likely that BNPL will face increased regulation in 2024.

While it’s not yet known what this may look like, the new BNPL regulatory framework will likely address concerns relating to transparency, consumer understanding, data harvesting, and potential risks associated with deferred payment models.

This potential tightening of regulation is driving speculation that the BNPL bubble may be about to burst - but this is not necessarily the case. While it may lead to tighter controls, the stricter measures may be a good thing for BNPL providers and consumers.

PayPal’s strengths in BNPL

As a global leader with more than 20 years of payments experience and 11 years of BNPL experience, PayPal is a brand that merchants and consumers trust.

With decades of experience working with regulators and credit bureaus, compliance is at the heart of everything PayPal offers including their buy now, pay later solutions.

All transactions that go through PayPal Pay Later are bolstered by the security and trust that consumers and businesses have come to know when using PayPal. As an added layer of peace of mind and confidence, all qualifying transactions also receive PayPal’s Purchase Protection.

Potential consequences of a BNPL bubble burst on the retail and e-commerce sectors

BNPL is a popular payment method amongst consumers. It provides them with the flexibility to purchase goods when they need them but split the payment over the coming months. Which can be easier for some consumers to budget for. It has been reported that, 1 in 10 US consumers regularly use BNPL services and it is anticipated that the number of BNPL users is expected to double by 2027 to reach 900 million.⁶

Additionally, BNPL services provide many benefits for retailers. By offering BNPL retailers can attract new customers, one that perhaps wouldn’t otherwise be able to make a purchase without BNPL. Attracting new customers can help retailers make new sales, increase their average order value (AOV) and also build customer loyalty.

If consumers feel they can trust a retailer’s BNPL service, this will likely encourage repeat business and potential word of mouth referrals to friends and family. Further boosting sales for retailers. Should the BNPL bubble burst, it could potentially have a significant impact on the retail and e-commerce sectors. Regular users of BNPL may become more cautious about their spending habits, leading to reduced consumer spending.

If this were to happen, this drop in sales could lead to inventory challenges as demand for products declines, including potential losses driven by excess inventory holdings. It could also lead businesses that rely heavily on BNPL sales to reevaluate their business models to adapt to a changing market.

Navigating new markets with PayPal

PayPal's extensive experience as a global payment platform positions it as a leader in navigating diverse payment landscapes, employing sophisticated risk assessment tools to evaluate transactions, reducing the risk of defaults, and helping compliance with regulatory frameworks.

As a trusted provider of BNPL services with more than 20 years of experience in payments and 11 years in BNPL, PayPal can use their knowledge in regulatory environments to help enterprises navigate the regulatory landscape and help provide a secure, robust BNPL payment experience for consumers.

Explore how your business can accept PayPal Pay Later.