Regulation Z Prime: The pressure is on for Buy Now Pay Later companies

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  Quantumrun Foresight
• January 30, 2023

Buy Now Pay Later (BNPL) payment services took off during the COVID-19 pandemic when many Western consumers migrated to online shopping but couldn’t afford to pay full amounts or pay with credit cards. The BNPL services (primarily offered through select banks, fintech apps, and large tech retailers) allow consumers to defer payments with supposedly lower fees than regular credit cards. Still, regulators warn that BNPL services are open to deceptive and hidden charges.

Regulation Z Prime context

In the US, anyone who took out a mortgage, home equity, or personal loan has Regulation Z to ensure that the terms of those loans are disclosed upfront. Also known as the Truth in Lending Act (TILA), this regulation was created to stop lenders from using predatory practices against consumers. Lenders must disclose borrowing costs so that people can make informed decisions about loans. For example, Regulation Z restricts how loan originators may be compensated and prohibits them from directing consumers to higher-paying loans. Meanwhile, by law, credit card companies are required to offer information about interest rates and fees before a consumer opens a new credit card.

However, BNPL payment services are not yet (2022) included in the Regulation Z provision. And because there is no clear oversight on what exactly BNPL entails, even financial institutions like banks are using it. Meanwhile, BNPL has become very attractive to younger generations because of its convenience and zero paperwork. Customers may choose to have their goods delivered immediately at checkout, but they must pay for it in full after 30 days or in installments over time. Three or four equal-sized payments are usually taken straight from issued payment cards. There are no additional costs or interest to worry about, as long as the customers pay on time. The service provider charges every participating merchant a 2 to 6 percent commission for each transaction plus a small, fixed fee.

Disruptive impact

State and federal authorities in the US are becoming increasingly concerned about the deregulated environment of BNPL. While the practice seems helpful and convenient, many consumers may not be aware of the scheme’s implications simply because there’s no requirement for loan providers to inform them of anything. These potential consequences include hidden charges or negative credit scores for late payments. According to the National Consumer Law Center, people can incur significant debt without realizing it. There is no interest involved, yet many of these plans have high penalty fees, which may add to more than interest.

The state of California is leading the charge on regulations, and in 2021, it classified BNPL arrangements as loans, bringing these companies under the state’s lending rules. Using this broader regulation, officials have gone after a handful of firms that the state claimed were not adequately disclosing terms or protecting consumers. Meanwhile, the nonprofit National Community Reinvestment Coalition (NCRC) urged the Consumer Financial Protection Bureau to classify BNPL platforms as “card issuers” that should abide by Regulation Z and TILA legislation. In addition, NCRC claims that BNPL products withhold information on their “true cost.” The exclusive partnership between BNPL providers and some merchants can also undermine competition.

Implications of Regulation Z prime

Wider implications of Regulation Z prime may include: 

• The increasing popularity of BNPL in e-commerce, leading to more providers that aren’t upfront about their fee structure.


• Regulators reviewing BNPL schemes to see how they can be incorporated into Regulation Z and TILA, which will lead to the closure of some of these BNPL offerings and providers.


• Increasing review and lawsuit cases against BNPL providers for high consumer debt and data harvesting.


• Different treatment of BNPL providers across US states, leading to the more confusing and arbitrary implementation of this practice.


• More countries reviewing how BNPL is being locally implemented, including creating regulations to limit its use.

Questions to comment on

• If you use BNPL, what makes it convenient for you?


• How else can governments ensure that BNPL providers are not taking advantage of customers?