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Happy Friday, Fintech Takers!

I hope you’ve had a lovely week.

I’m just getting back from Washington, D.C. The theme of my trip was BNPL, and there has been some interesting BNPL news this week, so I figured I’d break it down in today’s newsletter. 

I’ll try not to go on and on. We published a very comprehensive deep dive essay (sponsored by WEX) on the evolution of embedded payments yesterday, which I hope you have on your reading list!

- Alex

Was this email forwarded to you?

OK! We knew this was coming, and now it’s here: the nation's first comprehensive Buy Now, Pay Later (BNPL) regulations, courtesy of the state of New York.

I’ve read the proposed regulations, and, surprise, surprise, I have some thoughts!

So, here’s what we’re going to do. I am going to ask and answer a set of questions about the regulations, and because my mom is a big fan of Billy Joel and I love my mom, I will organize the Qs and As using lyrics from Mr. Joel’s iconic song, New York State of Mind.

Why is New York doing this?

This is clearly a response to the libertarian performance art piece that Russell Vought has been staging at the CFPB for the past year. New York Governor Kathy Hochul described the regulations as “nation-leading,” and consumer advocates (who are THRILLED) are working to position them as a blueprint for other states to leverage.

Put simply, the states are stepping in to fill the consumer protection void left by the Trump CFPB, and New York is the tip of the spear. I expect other states to follow.

How similar is this to what Rohit Chopra tried to do when he was in charge of the CFPB?

New York’s regulations are much more ambitious, but there are some similarities.

In May of 2024, the CFPB released an interpretive rule that attempted to make BNPL lenders adhere to some of the requirements for credit card providers under the Truth in Lending Act (TILA). Specifically, the bureau tried to force BNPL lenders to comply with Reg Z (the implementing regulation for TILA) Subpart B, which includes requirements for lenders to investigate disputes, facilitate refunds for returned products or cancelled services, and provide periodic billing statements. This interpretive rule was highly controversial (the Financial Technology Association sued the CFPB over it), and Director Vought withdrew the rule before that lawsuit could play out.

New York’s regulations take a similar stance, applying TILA-like consumer protections to BNPL products. 

Consumers are allowed to submit disputes, and lenders are required to acknowledge and resolve disputes in a timely fashion and are not allowed to collect on the disputed amount or report negative data to the credit bureaus during that time. Lenders are required to make reasonable efforts to pursue refunds from merchants on behalf of customers and to pass those refunds to them in a timely fashion. Lenders are required to send periodic statements for each billing cycle in which an account carries a balance or a finance charge has been imposed, at least 14 days before the payment due date for billing cycles of 30 days or more or 7 days for shorter cycles.

However, New York’s TILA-esque obligations go further than the CFPB’s. In addition to disputes, refunds, and statements, the regulations would also cap consumers’ liability for unauthorized transactions at $50 (the same cap that exists for unauthorized credit card transactions under TILA). They also mandate some fairly specific pre- and post-transaction pricing and terms disclosures (including whether the lender is going to furnish data to the credit bureaus).

Which companies are covered under New York’s regulations?

The regulations define a “BNPL loan” in very broad terms: any closed-end credit provided to a consumer in connection with a particular purchase of goods or services. 

It excludes loans made in connection with motor vehicles as well as loans made by the companies that are selling the goods or services. It also excludes credit extended for business purposes.

Do BNPL lenders need to be licensed? 

Yep!

Any company that wants to offer BNPL loans to New Yorkers needs to obtain a BNPL license. "Banking Law entities" are not required to obtain a separate BNPL license, but must obtain authorization from NYDFS before getting into BNPL. 

Additionally, all BNPL lenders must obtain “category permissions" specifying whether they are authorized to offer interest-free BNPL loans (pay-in-4 BNPL loans are a common example), interest-bearing BNPL loans, or both.

Hang on. What are "Banking Law entities"? 

Good question. That term refers to New York state-chartered banks and New York-licensed foreign banking corporations. These are the institutions that are not required to acquire a separate BNPL license.

That definition obviously doesn’t include national banks chartered by the OCC, but they have broad federal preemption from state laws, so they’re fine. 

The interesting question is banks chartered in other states. Having read the regulations carefully, my best guess is that state-chartered banks, including ILCs, will need to get BNPL licenses if they want to offer BNPL loans in New York. Federal preemption for state-chartered banks is very limited. It will help when it comes to avoiding rate caps for interest-bearing loans, but it won’t spare BNPL lenders from most of New York’s regulations.

Do New York’s regulations include any requirements for how BNPL lenders originate loans? 

Similar to how mortgages and credit cards are regulated under TILA, BNPL lenders are required to conduct “reasonable risk-based underwriting, which includes, at a minimum, assessing a consumer’s income and indebtedness.”

New York’s regulations also include this very unusual requirement: 

No BNPL lender shall use the credit worthiness, credit standing, or credit capacity of any member of the consumer’s social network for purposes of determining the availability or price of credit that may be issued to the consumer. 

Truly, I have no idea what this means or why New York’s Department of Financial Services put it in there. I assume they are referring to social networking services like Instagram and TikTok, but I don’t know for sure. They don’t define “social network” any further in the regulations.

Do the New York regulations cap the prices BNPL lenders can charge?

Yes, indeed, they do.

Interest-bearing BNPL loans are subject to New York’s existing interest rate ceiling, and the regulations adopt a broad definition of what constitutes "interest" (origination charges, finance charges, etc).

Perhaps taking inspiration from what the Chopra CFPB tried to do on credit card late fees, New York has also proposed establishing an $8 safe harbor for BNPL late fees (a lender that wishes to charge more would need to show the NYDFS its math and convince it that the fee is still reasonable). The regulations prohibit penalty fees that exceed the dollar amount of the underlying violation, multiple fees for a single event, and aggregate penalty fees that exceed the original amount financed.

Finally, the regulations also severely restrict BNPL lenders’ ability to ask customers for tips (clear disclosures, limited solicitations, no dark patterns, etc.) I’d prefer a blanket ban, but this is still pretty good.

Is there anything else notable in the regulations?

There is, and it’s big!

The regulations contain expansive data privacy protections.

BNPL lenders are restricted from using, selling, or sharing "covered data" — defined as any non-public information on a consumer, including PII, transaction or account-level data, and consumer metadata — only with the consumer's consent, and only for each specific use case separately disclosed.

Consumer consent expires after one year and must be renewed. The regulations explicitly state that targeted advertising, individualized pricing, cross-selling of non-requested products, and the sale of covered data are not considered "reasonably necessary" to provide the consumer's requested product or service.

These requirements have the potential to be very annoying to certain BNPL lenders.

Block, for example, is going to be selling its credit score (based on its first-party customer data … including Afterpay customer data) to other lenders. That plan is not incompatible with New York’s regulations because Block is planning to implement it with extensive consumer permissioning built in. But still, compliance with the regulations will introduce some additional friction, such as having to re-obtain consent (which expires after a year) and having to ensure that third parties delete the data if the consumer revokes consent.

Klarna is an even better example. The company has built an advertising business on top of its BNPL customer data — using transaction histories, shopping behavior, and purchase intent signals to power targeted ads and merchant marketing tools. Advertising is a material and growing part of Klarna’s business. The company made $180 million from it in 2024, good for 6% of its total revenue that year and an increase from just $13 million in 2020. 

Under New York’s rule, advertising is explicitly not “reasonably necessary” to provide a BNPL loan. That means Klarna would need separate, affirmative opt-in consent for advertising and data-sharing purposes, cannot bundle that consent with loan access, and must renew it annually.

MORE QUESTIONS TO PONDER TOGETHER

Big news for the endlessly curious (yes, you): I’m collecting your fintech questions on a rolling basis. 

What’s keeping you up at night? What great mysteries in financial services beg to be unraveled? Think of it this way, if a stranger is a friend you just haven't met yet, your question is a Fintech Takes conversation waiting to happen. 

One that could headline a Friday newsletter or be answered in an upcoming Fintech Office Hours event.

Drop your question here, whenever inspiration strikes!

Thanks for the read! Let me know what you thought by replying back to this email.

— Alex  

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