BNPL regulation is urgently needed. But not all providers are the same.

The Consumer Financial Protection Bureau late last year opened an inquiry into buy now/pay later programs, which sent the shares of Affirm and other fintechs tumbling. This move toward responsible financing is a necessity and has been expected for some time — and now the question is how regulators should go about it.

Without falling within a credit-related regulatory framework, small venture-backed BNPL teams innovated faster than large financial institutions and developed, launched, tested and promoted their services at a dizzying speed with almost no restraint. Today, they have the ability to shift consumer behavior — a tremendous amount of capital is being invested into the BNPL market, and billions of dollars of credit are being deployed by giant fintechs.

But consumers that use these nonregulated financial services can potentially be on the receiving end of irresponsible lending and data-collection practices. Easily accessible BNPL services can mean missed payments that incur a fine or affect a credit report. And there’s also no limit; consumers could utilize over five different BNPL services within a single month.

Regulators cannot let such accumulation of consumer debt continue without tracking it and reining it in. However, the BNPL space is also full of other regulated services available through financial institutions, so not all providers operate in the same environment. Here’s why regulation is needed and what regulators need to consider during the probe.

First, it is important to recognize that BNPL providers vary; there’s no one-size-fits-all approach to regulation.

BNPL providers all operate differently; some have already shown signs of wanting to commit to providing consumers responsible financing even in the absence of regulation, with no late fees or hidden costs. But there is too much inconsistency in the market, especially with more than 170 unregulated BNPL startups competing, many of which aren’t putting consumers’ financial interests first.

Even if you look at the three gorillas that the CFPB is investigating — Affirm, Klarna and Afterpay — there are significant differences. Affirm has partnerships with chartered banks to provide loans and communicates with credit bureaus, and Klarna has obtained full banking licenses from some countries and requires a hard credit check if a consumer applies for a six-month, 12-month or 36-month installment loan. Afterpay, by contrast, operates in a nonregulated type of environment, though that may change after its recent acquisition by Square (now Block).

For the startup BNPL services proliferating the market, regulators will witness the same lack of consistency.

Regulators need to keep this in mind when drafting a resolution and avoid painting all BNPL providers with the same brush.

It is also important to acknowledge that regulation already works. Banks are the proof.

Fintechs proved there is a need for BNPL products and services and carved out one of the fastest-growing payment methods that is now expected by consumers. They paved the road for traditional lenders and banks to enter the BNPL scene and flourish with partners.

With the strength of regulated banks, BNPL products have already been boosting brand reputation and trust, reassuring customers that the merchant they are doing business with prioritizes transparency and credibility.

Regulators have the chance to help build holistic financial services and should look at various case studies where banks have started deploying BNPL services with numerous advantages, like Capital One Financial and Goldman Sachs.

Citizens Financial Group, through Citizens Pay, is also a leader in regulated point-of-sale financing and has served more than 5 million accounts. Businesses and merchants that have partnered with Citizens Pay for custom BNPL solutions can create a purchasing experience that drives positive sales results in a financially responsible way.

As regulators crack down on BNPL providers and force them to align with requirements banks have been conforming to for years, banks would be well advised to strengthen their position in the market. Even larger fintechs, realizing the urgency of the situation, are looking to move into a more regulated space. For example, Klarna launched its first consumer banking account in Germany, proving that regulation is the future.

I am by no means encouraging regulators to stifle innovation. There’s no denying that fintechs have made financial services and credit more accessible and inclusive. But there has to be more of a balance between consumer accessibility and responsible lending.

Take embedded finance, where nonbank businesses integrate financial mechanisms into their user journeys. The service providers supply the technology, while lenders provide the financial products and fundamental infrastructure. This financial innovation removes consumer pain points, such as the need to seek credit elsewhere, and open banking enables access to financing provided by regulated financial institutions.

With BNPL, the problem is the lack of mandatory reporting to a regulatory body and credit bureaus and the shortfall of data available to other lenders. Information and visibility are essential for BNPL services to continue being agile and efficient.

Equifax recently reported that it would add a business industry code for BNPL to classify data such as payment history — a move that will make BNPL loans visible on credit reports. TransUnion is also working on its own BNPL credit reporting service. This is all going in the correct direction.

However, if TransUnion creates an easy way to digest credit information, the data has to be reported in the first place. Regulators must entertain the idea that fintechs should ping credit bureaus before they underwrite or approve a loan application.

All of us in the financial industry should strive for responsible lending and loans that can be repaid without putting pressure on the consumer and economy. This CFPB probe is a huge opportunity to gain transparency into the BNPL market.

As of 2022, the CFPB is keeping a closer eye on potentially harmful consumer credit products — and it’s about time. And as the new regulations are decided upon, regulators must avoid placing all BNPL providers in the same basket and look to banks for proof of how BNPL services can have consumers’ financial health close to heart.