New York’s attempt to regulate the buy now, pay later market may cause some smaller providers to cease doing business in the state, or adjust their offerings, attorneys said.

Earlier this month, New York Gov. Kathy Hochul announced that legislation to regulate the popular installment loans would be included in her fiscal year 2025 budget proposal. 

As consumers turn to BNPL loans for everyday and larger purchases, Hochul seeks to require BNPL providers to obtain a license to operate in New York, and have the state’s Department of Financial Services put stronger regulatory guardrails around the industry. In New York, a governor can introduce legislation by way of the executive budget.

The proposed legislation would amend the state’s banking law to give the department licensing and regulatory authority over BNPL providers and loans. That would enable the state to regulate the industry “with a focus on building stronger consumer protections around disclosure requirements, dispute resolution, credit reporting standards, late fee limits, and consumer data privacy,” according to a memorandum in support of the legislation. 

The department would also review guidelines to “curtail dark patterns, debt accumulation, and overextension,” the memorandum noted.

New requirements piling on additional compliance burdens may lead some providers to pull their operations in New York, “if they realize that the cost-benefit calculus here far outweighs potential revenue considerations,” said Eamonn Moran, senior counsel at law firm Norton Rose Fulbright specializing in consumer financial services.

That may not be the case for larger players such as San Francisco-based Affirm or Stockholm-based Klarna, but it could be true for some of the smaller providers in the BNPL arena, he said.

Any time a “pretty aggressive” new regulatory apparatus takes shape, “there’s always the possibility, especially for those smaller players, that it may not be economical for them to continue, given the potential compliance costs,” Moran said.

Susan Seaman, a partner at law firm Husch Blackwell, also noted the bill’s broad definition of BNPL. As it stands, it would rope in other point-of-sale financing or even credit cards, attorneys said.

“With these kinds of laws, the devil’s always in the details,” said Seaman, a consumer financial services regulatory attorney. “There needs to be some discourse between the lawmakers and the industry, to really iron this out.”

If the regulation remains as broad as it is currently, companies may look to refocus their offerings, dropping pay-in-4 products for interest-bearing installment loans, she said.

“When you start adding regulations onto a product like this … you will see, naturally, some of the smaller players look for other models, or consolidate,” she said.

New York tends to be a first-mover in the consumer finance space, and the bill’s consumer protection focus seemed consistent with related concerns the Consumer Financial Protection Bureau has raised, Seaman said. That includes the need for disclosures, addressing disputes and returns, and concerns around debt accumulation, she said. 

To that end, the bill features a provision that would require BNPL providers to conduct an analysis on a customer’s ability to repay. However, more details on that analysis are left to be defined by the NYDFS, Moran noted. 

“How stringent of an analysis that will be remains to be seen,” he said. “But it is a bit striking.” 

There’s also a provision that would mandate accurate data for credit reporting be maintained, although it punts on whether BNPL providers have to report the data to credit bureaus or how the bureaus should incorporate that data into credit reports, Moran noted.

He’s also encouraged by the bill’s attempt to address returns, refunds and credits, which has been a “major sticking point” for BNPL, he said. It’s another element of the installment trend that’s caught the attention of the CFPB; a bureau official last year mentioned the CFPB’s concern with how consumers can dispute BNPL transactions.

Overall, “this is a pretty ambitious attempt to address a lot of the key issues and concerns that have been raised about this sector of the marketplace,” Moran said. It’s also interesting to note that DFS Superintendent Adrienne Harris “is given broad authority to do any number of things to help implement this proposed legislation,” he added.

Other states may follow New York’s move, and the CFPB might be content to let states take the lead on BNPL regulation. The bureau has plenty on its plate when it comes to rulemakings, and the CFPB has encouraged states to use their enforcement authority and be a regulatory partner, Seaman pointed out.

The CFPB has flagged its BNPL-related concerns and issued reports, “and now they might just let someone else take up the fight,” Seaman said.