The Consumer Financial Protection Bureau (CFPB) recently took action to make sure that consumers can dispute charges and obtain refunds on BNPL products and services, making BNPL lenders follow similar rules as credit card companies. So, what does this mean for banks and Fintechs?
As a Fintech industry professional, Yaacov Martin, CEO of The Jifiti Group, a global Fintech company that powers embedded lending solutions for banks, lenders and merchants, wanted to share his insights on some key developments in the ecosystem.
Yaacov Martin has provided key perspectives.
Our conversation with Yaacov Martin is shared below.
Crowdfund Insider: Following the CFPB’s ruling, how will the competition between banks, traditional lenders, and BNPL providers change?
Yaacov Martin: Meeting extensive consumer protection standards, such as those derived from the Truth in Lending Act and the CFPB’s recent interpretive rule, requires substantial resources, expert knowledge, and robust procedures.
Establishing these regulatory safeguards demands considerable upfront costs, creating difficulties for BNPL fintechs as they compete with banks. The increased operational expenses put these fintechs at a natural disadvantage compared to banks, which benefit from low capital costs and strong financial reserves.
As a result, the BNPL market is expected to consolidate, with only a few Fintechs capable of fully meeting these stricter requirements, while banks and other traditional lenders will gain a stronger foothold in the market.
Crowdfund Insider: Will banks be better positioned to compete in the BNPL space thanks to the new regulations?
Yaacov Martin: Banks and established financial institutions, already operating within compliant frameworks, are well-positioned to gain a larger share of the market. Economic factors and rising interest rates have already begun to shift the pendulum towards banks in the embedded lending/BNPL space. The CFPB’s new rule will further tilt the market towards banks and regulated lenders. This shift presents a compelling opportunity for undecided banks to enter the embedded lending space to capitalize on this market transition.
Crowdfund Insider: How can BNPL providers differentiate themselves from banks in this new landscape?
Yaacov Martin: BNPL providers can differentiate themselves from banks by focusing on providing value-added services to merchants and consumers. For example, as many direct-to-consumer BNPL fintech companies already do, providing a merchant marketplace as well as a broad scope of online commerce tools such as Klarna’s shopping assistant. Another area that BNPL fintechs can hone in on is enhancing the user experience and improving accessibility.
Additionally, as banks and regulated lenders are increasingly focusing on larger-ticket consumer purchases, business financing and alternative sectors, such as healthcare financing, equipment financing and so on, direct-to-consumer (D2C) BNPL fintechs can continue to specialize in their bread-and-butter – split pay options for smaller-ticket retail purchases. In light of the CFPB ruling, these split pay options will now be regulated as credit card products and services.
Crowdfund Insider: How will the CFPB’s ruling influence how BNPL providers customize their products and services to meet the evolving needs of consumers, especially regarding transparency and dispute resolution?
Yaacov Martin: In classifying major BNPL providers as credit card issuers under the Truth in Lending Act, the CFPB has brought much-needed standardization to the industry’s regulatory oversight. Under the new rule, BNPL lenders must now extend key consumer protections that credit card users have long enjoyed, including:
- Investigating customer billing disputes in a timely manner
- Issuing refunds when goods are returned or services canceled
- Providing periodic statements detailing transactions and balances
Data shows over 13% of BNPL transactions involved returns or disputes in 2021, totaling a staggering $1.8 billion across just five major firms. Clearly, standardized processes to handle these situations were lacking.
Crowdfund Insider: What innovations can we expect from BNPL providers to improve the customer experience under the new regulations?
Yaacov Martin: The CFPB’s recent interpretive rule is unlikely to significantly impact innovation in the payments industry. However, it may actually boost consumer adoption of BNPL services due to the enhanced protections it provides. The increased safeguards could make customers feel more secure, potentially leading to wider acceptance and use of BNPL options.
Crowdfund Insider: This ruling requires BNPL providers to follow some credit card consumer protection rules. How will this impact banks’ existing credit card offerings and could this potentially lead to new collaborations with BNPL providers?
Yaacov Martin: Banks can look to integrate BNPL or split pay options as an additional payment choice within their existing credit card product suite, enabling them to compete in the BNPL market with a compliance-assured offering.
For banks with large credit card customer bases, rolling out an embedded lending product provides a cross-selling opportunity to existing cardholders who may want access to financing at the point of sale. Since 79% of existing lines of credit on credit cards are not utilized (Accenture data), banks can give customers an alternative way to use the credit that’s due to them, often with more attractive terms.
Regarding partner collaborations, banks can turn to white-labeled embedded lending enablers to swiftly bring their compliant financing programs into the embedded lending market, at this opportune time for banks and regulated loan programs.
Crowdfund Insider: Can traditional financial institutions use the BNPL market by offering similar products or integrating BNPL functionalities into their services?
Yaacov Martin: Banks and regulated lenders can leverage their existing compliance infrastructure and processes to offer embedded lending products that adhere to the new guidelines relatively easily compared to Fintechs and scale their own white-label solution to merchants looking for a compliant installment lending option.
Crowdfund Insider: Aside from the immediate impact on BNPL providers and banks, what are other broader implications of the CFPB’s ruling for the consumer credit market?
Yaacov Martin: In the long term, ‘consumer credit’ in general becomes an industry with a higher entry barrier. In many ways, there could be a lot of investment money that is seeking deployment avenues, but has fewer options as not every Joe can now launch a consumer credit product.
Therefore, there can be quite a bit of new capital looking for a home. This can result in one of the following:
1. Traditional banks and FI’s are able to raise more money (deposits) at an even more competitive rate (therefore prices go down).
2. The B2B market, which is more complicated but less regulated, gets a big boost.
Crowdfund Insider: Will this decision set a precedent for further regulations in the fintech space?
Yaacov Martin: This clearly shows that the regulator is not going to stand for double standards in the world of consumer lending – therefore – we can assume that in places where there are voids that are being taken advantage of – the regulator will work hard and fast to close that gap.
Crowdfund Insider: How can this ruling contribute to a more responsible and transparent credit ecosystem?
Yaacov Martin: If companies (including BNPL fintechs) are tasked with going the full length of consumer protection (along with the overhead that this entails), we can only assume that they will also need to choose their customers more wisely. I believe that this will encourage BNPL fintechs to seek better underwriting information and will probably lead to credit checks as well as reporting.