Jordan Gal is the co-founder and CEO of Portland, Oregon-based Rally, which provides checkout services for merchants. He is based in Chicago.

Back in September, the U.S. Consumer Financial Protection Bureau issued a report suggesting that companies like Klarna and Afterpay might be subject to stricter oversight in the future. 

As the CFPB prepares to release new regulatory guidance on BNPL providers, it is important that any new regulations do not stifle the industry’s growth and limit its availability, as this could have a detrimental impact on both merchants and consumers. Instead, regulators should work to strike a balance between protecting consumers while ensuring that BNPL services remain a viable option for those who need them.

How can the CFPB pull that off? And why is BNPL an important option for young consumers and a way to support small merchants? 

As an easier way to make big purchases and better plan cash flow over time, BNPL represents a shift in the way young people approach budgeting and spending. Despite being relatively new, BNPL financing has already become a ubiquitous presence through e-commerce, with numerous businesses looking to offer the service to their customers.

The popularity of BNPL is a testament to values of a younger, more financially conscious generation like Gen Zers. For financially conscious young consumers, the offering represents an attractive alternative to traditional credit cards. A new study by Citizens Pay cites consumers increasingly turning to BNPL for bigger lifestyle purchases like marriage costs.

The value that BNPL presents for merchants to differentiate themselves is noteworthy. By spreading the cost of purchases, merchants make their offerings accessible to a wider audience, fostering increased sales and retaining customers who return for the flexible payment options. Introducing BNPL lending alternatives can broaden their payment ecosystem and entice a new demographic of customers who may have previously not been able to afford engaging with this brand. It also brings a new way to generate loyalty. By presenting the opportunity to pay in increments, customers are more likely to make recurring purchases. Amidst a competitive marketplace, BNPL empowers small merchants to strategically position themselves for success.

However, the looming regulatory guidance from the CFPB might cast a shadow over this promising horizon. There’s a valid argument that consumers need protection from potentially predatory practices and hidden fees. Yet, the question remains, how do we avoid a regulatory chokehold that limits BNPL availability, thus depriving merchants and consumers of its distinct benefits?

The lesson for the CFPB here is to understand that an over-regulated BNPL landscape may result in significant losses for merchants, stripping them of a powerful tool for differentiation and customer loyalty. For consumers, especially those for whom traditional credit options are either too expensive or too restrictive, this could mean losing a lifeline.