CFPB warns of risks for consumers linked to new payment products and foreshadows BNPL supervision | Sheppard Mullin Richter & Hampton LLP
Recently, the CFPB released a report outlining the challenges and risks inherent in the rapidly evolving payment ecosystem, with a particular focus on emerging use cases involving “super apps”, buy now, pay more later (BNPL) and in-app payments, as well as their implications for consumers. The report notes that these changes are creating more opportunities for companies to aggregate and monetize consumer financial data, and for big players to dominate consumers’ financial and business lives.
- Great apps. More prevalent overseas, super apps combine multiple services into a single smartphone app, giving users “almost all the capabilities needed to live their lives online, essentially ‘internet in an app'”. The report acknowledges that super apps are unlikely to gain traction in the US because “the US market is developing differently.” In the United States, “banking in an app” models are more prevalent and offer a wide range of financial, payment and commerce functions within a single application in order to add value and build customer loyalty. user. Despite their benefits, the report warns that super apps can limit consumers’ choice of products and services, creating the opportunity for providers to steer consumers towards specific solutions and/or limit access to certain products.
- BNPL are “a form of unsecured short-term credit that allows consumers to split purchases into four equal interest-free installments at the point of sale, with the first installment due at checkout” (we have discussed BNPL in blog posts precedents here, here, and here). The report tracks the progression from version 1.0 of BNPL described above to a version 2.0 that has “pivoted to a ‘lead generation’ business model” where providers “route consumer traffic directly through their own apps and monetize this traffic by charging the merchants for the referral (or affiliate fees). In some cases, the referral fee a merchant pays the provider can exceed 10% of the transaction amount.
- Integrated trade. In-app commerce “allows purchases to happen directly on a social media feed’s website or app rather than through traditional advertising links to a retailer’s own site.” The report notes that “[e]Embedded commerce can make it easier for a consumer to be defrauded by an illegitimate merchant or to unwittingly engage in a subscription that results in ongoing payments.
Finally, the report concludes with areas of interest to the Bureau: (i) proposing a rule to implement Section 1033 “to give consumers greater control over their financial data, including their payment data and transactions;” (ii) publishing a report on its findings from its BNPL oversight orders and “determine whether regulatory interventions are appropriate”; and (iii) seek to mitigate the potential consequences of large technology companies entering the real-time payments space.
Put into practice : This recent report is part of a long line of aggressive and active CFPB advice that seeks to focus on big tech involvement in the payments space. It is prudent for BNPL providers to understand the regulatory implications so that they can be prepared for any potential regulatory inquiry, review or investigation.