What exactly is BNPL again?

Early in June, the Consumer Financial Protection Bureau (CFPB) announced that it will regulate BNPLs like credit cards.

But, wait a second, we all thought BNPL was like a credit card. And if it's not, how is it different again? And why wouldn’t someone just use a credit card to buy a $100 T-shirt?

You might not be the only one asking these questions. Despite being one of the fastest growing financial products in the the market over the last decade, BNPL is surprisingly misunderstood.

First, the acronyms.

BNPL stands for Buy Now, Pay Later. Doesn’t sound terribly novel? You might be right. It is basically financing.

You want to buy a couch you can’t afford right now.

You pay for the couch using credit.

You get the couch today.

You pay back the couch’s price over 24 months.

Closed end versus Open end credit.

The big difference between BNPL and a credit card is that most BNPL products are structured as a closed-end loan whereas a credit card is an open end revolving product. The main difference is your ability to take out more credit after your repayment.

BNPL = you need to buy a $1,000 couch and you take out a $1,000 loan to pay for it. You go through all the paperwork to get a loan. Once you pay it back, the loan is repaid. You and the loan are done with each other. To buy, say, a chair, you would need to take another loan and go through all the regulatory disclosures required to issue the loan all over again.

Credit card = You apply for a credit card and go through all the paperwork in the beginning. You have a $1,000 credit limit and you use up your limit to buy your couch. Once you repay the $1,000 credit, you still have $1,000 remaining that you can use again to buy that chair without having to go through any paperwork. In other words, your $1,000 gets replenished like a revolving door.

Why a loan?

BNPL exists on the premise of a loan partly because it is a financial product with more predictability and so appealed to a generation that was generally skeptical of credit cards. When you take out a loan, your repayment amount is fixed at origination. So, with 10% interest, you would only pay $100 (interest) + $1,000 (your principal) no matter what happens (putting aside late fees).

Credit cards though charge interest on your balance from month to month. So every month, you are accruing interest on your $1,000 balance making your repayment balance bigger and bigger. Over time, if you don’t pay off your balance, you could end up paying a lot more than the $1,000. This is why credit cards have a negative reputation — one can drown in debt fairly easily from a few purchases.

But the differences here are subtle. You’re still taking out financing and have a repayment schedule.

So why does BNPL exist as an alternative to credit cards?

The reason BNPL exists is less legal and financial and more tech.

BNPL was built as a virtual, online product. It is meant to replicate you walking around a store with the power of your credit card (i.e., purchasing power) in your pocket. Unlike a real store though, the virtual internet economy demands speed. Small pieces of friction like having to reach for your credit card in your pocket might reduce the likelihood that you complete a purchase (i.e., while reaching for your credit card, you might take your eye off the screen and think twice of whether you really need that couch).

The BNPL product is strictly virtual. All the loan documentation is done electronically. There’s no physical card, and as you’re walking around the virtual store, it is like having financing already built into the mechanics of the e-commerce experience. Rather than putting in credit card information, you need to do what is entirely intuitive for online behavior — you just need to “click” a button.

A Marketing Tool

In that sense, BNPL is less about the consumer and more about helping e-commerce merchants using financing to sell more things. In an online environment, merchants know they have the consumer’s attention for only a split second. They want you to just click “I agree to terms” while your eyes are already set on the computer or phone screen.

So, BNPL is more like a marketing tool for merchants. Because it is a virtual product, there’ s a lot more you can do to show your purchasing power in an online environment. When you stroll the virtual store, you are shown prices that factor in your approved financing (so it’s not a $1,000 couch; the merchant — working with the BNPL that knows who you are — will show you a couch that is only $100 a month).

BNPL speaks the online language and so it is more like an online friendly version of financing. BNPL rose on the back of the e-commerce market growing over the last decade where people are more likely today to buy a t-shirt online than at a mall.

Credit is still credit.

But, ultimately, BNPL is just an old financing product (purchase finance) with the bells and whistles of technology. So, from a regulatory perspective, it is hardly surprising that the CFPB has decided to regulate BNPL as if it were just a credit card.

The impact of the CFPBs announcement on the industry or the product will not be significant. BNPLs already offer the Truth in Lending Disclosure that accompanies credit cards. They follow the other regulations (like the Military Lending Act, Anti-Money Laundering regulations, etc) that accompany credit products.

The only difference is that, with this news, the CFPB continues its expansion into being the de facto regulatory body for trendy new financial products. Now that the Supreme Court has upheld the CFPB’s funding structure (something which has been debated for years), a more assertive CFPB expanding its regulatory umbrella is hardly surprising.

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While we hope you found this post helpful, please note that the information in this post is not intended to be legal, financial, tax, or regulatory advice. Please consult your own advisor when considering your stock options…options.

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