Three regulatory questions shaping the future of debt

Lending and debt are far from novel concepts, but many of the technologies distributing and structuring them are. New tools like alternative data and AI have permitted capital to be given to more people, and, at least in theory, at lower costs. But, without the right boundaries in place, these debt-related products may lead to more defaults, exploited consumers, and market collapses. Here are three questions shaping the future of debt markets—affecting issuers and consumers alike.

1. What’s next for BNPL?

Buy now, pay later (BNPL) has taken off in recent years as a means to offer zero-interest loans to consumers for everyday purchases. Though at its best the product can help alleviate cash-flow crunches, the sector at present lacks interoperability, which permits consumers to take out multiple BNPL loans simultaneously. This increases the risk of default for both BNPL providers as well as other lenders, such as car loan issuers or mortgage companies. 

The Consumer Financial Protection Bureau (CFPB) said last week that it’s developing “interpretive guidance” for BNPL lenders, which would make their products subject to the same guardrails as consumer credit cards. "Sustained usage is the risk that frequent BNPL usage may threaten borrowers' ability to meet non-BNPL financial obligations, such as rent, utilities, mortgages, auto loans and student loans," the CFPB said in its report, suggesting it may push for new rules before a recession arrives in full swing. 

2. What does privacy mean—and for whom?

Despite mounting pressure from consumer rights groups and tech giants alike, the US still lacks a comprehensive privacy framework in the style of the EU’s GDPR (or anything even close to it). While the White House’s blueprint for an AI Bill of Rights is only a list of suggestions at this point, the policy proposals hint at privacy rights landing in the Biden administration’s next wave of policy changes. 

Expanded privacy rights may have serious effects for BNPL providers and other lenders using alternative data to underwrite loans. Most notably, the cost of capital may increase, as customer support, communications, and compliance departments may grow to align with new directives. 

3. Are cryptocurrencies securities?

Finally, crypto-based lending has landed in the Securities and Exchange Commission’s (SEC) crosshairs. BlockFi, for example, had to pay $100 million in a settlement for failing to register its crypto lending product with the SEC. In addition to other woes it faces, if the crypto sector’s lending capabilities are constrained across the board by new regulations, then crypto may fail to take off as a full-fledged monetary instrument.