I remember as a child growing up in Ecuador, seeing signs in storefront windows that read “separe ahora y pague como pueda” or “reserve now and pay as you can”. These were especially common before holidays like Christmas or Mother’s Day. The system was simple: pick an item, make regular payments, and once the item was fully paid off, you could take it home. This was layaway, a low-risk, consumer-friendly method that allowed families to budget without going into debt.

But that approach has largely disappeared. In its place, a new and much flashier method has emerged: Buy Now, Pay Later (BNPL). Unlike layaway, where you waited until fully complete payment to receive your purchase, BNPL gives you the item immediately while deferring payment. Its appeal exploded during the COVID-19 pandemic, fueled by the rise of online shopping and the ability to split purchases into interest-free installments.

While BNPL is often marketed as a modern, flexible alternative to credit cards, it brings with it a host of risks that are only now starting to gain regulatory attention.

What BNPL Is, and Isn’t

BNPL is a form of short-term financing that allows consumers to pay for purchases over time, typically in four or more interest-free installments. It’s commonly available at checkout, both online and in physical stores, with providers like Klarna, Afterpay (Riverty), and PayPal integrating directly into retail platforms.

Importantly, unlike, credit cards, BNPL is not a revolving line of credit. Consumers must reapply for each installment plan, each time they make a new purchase and once the debt is repaid, the relationship ends, at least until the next time financing is needed. Nor is it subject to the same legal protections that govern traditional credit products, in most jurisdictions.

What makes BNPL so enticing isn’t just its ease of use, it’s the way it taps into well-known behavioral biases. As psychologist Mark Travers, Ph.D. explains in Forbes, BNPL leverages temporal discounting, our tendency to favor immediate gratification over long-term benefits. Susan Weinschenk, Ph.D., writing in Psychology Today, adds that while many people believe dopamine is released when we receive a reward, it’s actually released in anticipation of one. When you place an order online, the product doesn’t arrive right away, but the excitement begins immediately. BNPL shortens that waiting loop: instead of earning the purchase, budgeting for it, or sitting with the desire, you just click “Pay Later”, and the reward feels instant. It’s a dopamine-fueled cycle where anticipation and gratification converge in a single step.

But when nearly half of BNPL purchases are non-essential, especially clothing and fashion, it becomes clear that this is not always a rational budgeting tool. It’s increasingly a mechanism for impulse buying, particularly among those who can’t afford the full cost upfront. The frictionless checkout experience, combined with minimal approval requirements and lack of credit checks, makes it especially appealing to young people and financially inexperienced users, who usually can’t afford the purchase.

From Everyday Convenience to Everyday Debt

Especially in the U.S., a troubling shift is underway: BNPL is moving from a tool of everyday convenience to a potential debt trap. As inflation pushes up the cost of essentials like groceries, more consumers are relying on BNPL to cover basic needs, marking a shift from discretionary spending to survival spending. The consequences are becoming clear: missed payments, mounting late fees, and the psychological burden of managing multiple short-term loans. For a product often marketed as “interest-free,” the reality is far more complex, and increasingly risky for vulnerable consumers.

The Regulatory Catch-Up: What’s Happening Around the World?

Australia

Australia has been at the forefront of BNPL adoption since 2014, with usage growing exponentially over the past decade. According to the How the World Does Digital report published in 2024, Australian consumers lead the world in BNPL usage for online purchases, surpassing peers in Brazil, France, Germany, Italy, Japan, the Netherlands, Singapore, Spain, the United Kingdom, and the United States.

Yet, despite its widespread adoption, BNPL remained largely unregulated in Australia for much of its rise. Until 2024, most BNPL arrangements fell outside the scope of the National Consumer Credit Protection Act 2009 (NCCP). This was primarily because these products typically did not involve interest or fees that would trigger the definition of a “credit contract” under the law. Even where fees existed, providers often relied on exemptions, for example, where credit was considered “short term” or where only a fixed, non-variable account charge applied.

That regulatory gap is now closing. On 10 December 2024, the Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Act 2024 was passed, introducing a new framework to regulate BNPL products by amending the NCCP to extend the operation of the National Credit Code (NCC). Starting from 10 June 2025, BNPL products, now classified as “low-cost credit contracts” (LCCCs), will be treated as regulated credit.

Under this new regime, BNPL providers will be required to hold an Australian Credit Licence (ACL) authorizing them to engage in credit activities as credit providers. They must also become members of the Australian Financial Complaints Authority (AFCA).

LCCC providers will now be subject to the full suite of obligations that apply to licensed credit providers, including responsible lending and general conduct requirements. These include acting efficiently, honestly, and fairly; complying with licence conditions; and ensuring consumers have access to effective redress mechanisms through AFCA. This means that BNPL consumers will have similar protections as any other credit consumers in the country.

European Union

Until recently, BNPL services operated largely outside the EU’s consumer credit laws. The original Consumer Credit Directive (CCD1), introduced in 2008, did not account for emerging digital lending models. But the exponential growth of BNPL, and the associated risks of overspending, opaque fees, and rising household debt, has prompted a regulatory overhaul. The revised Consumer Credit Directive (CCD2), adopted in 2023, brings BNPL firmly into scope. Set to be transposed into national law by the end of 2025 and fully implemented by Q4 2026, CCD2 expands protections and imposes new obligations on BNPL providers:

• The directive now covers non-mortgage loans up to €100,000, removing the previous lower threshold to ensure small-value credit, including BNPL, is regulated.
• Complying with national annual percentage rate (APR) caps will require BNPL providers to adjust their pricing models across EU member states. For example, a €100 late payment delayed by two months would incur a maximum fee of €2.50 in the Netherlands (15% APR), €2.67 in Luxembourg (16% APR), while Belgium’s cap of €20 for credit under €150 allows the current €15.00 fee to remain compliant. These differences highlight the regulatory complexity BNPL providers will face under CCD2.
• Providers are required to conduct creditworthiness evaluations before issuing BNPL credit, drawing on reliable financial data.
• Stricter disclosure rules mandate clear and comprehensive communication of terms, risks, and costs to prevent consumer confusion or deception.

These changes aim to align BNPL with broader consumer credit standards, ensuring consistent protections across the EU. But they also bring operational challenges. Providers will face higher compliance costs, may need to rethink business models, and could pass on costs to merchants or limit access to credit.

United States

As it is now widely known, the new administration has significantly curtailed the powers of the Consumer Financial Protection Bureau (CFPB), the agency charged with safeguarding consumers in the financial sector. On May 12, 2025, the CFPB withdrew 67 regulatory guidance documents, including interpretive rules, policy statements, and advisory opinions issued since the Bureau’s inception in 2011. Among these was a rule classifying BNPL services under Regulation Z provisions that apply to credit cards, an interpretation that, while imperfect, would have extended key consumer protections such as the right to dispute charges, request refunds for returned products, and receive periodic statements.

What does this mean for the millions of Americans using BNPL services? For now, their rights remain uncertain. Some states are stepping in to “fill the gaps” left by a less active CFPB. New York, for example, recently enacted The Buy-Now-Pay-Later (BNPL) Act in May 2025. The law introduces licensing requirements and consumer protection provisions specific to BNPL providers, although it will not take effect until 180 days after implementing regulations are issued.

A Product Too Easy to Love, Too Hard to Regulate?

BNPL’s rapid success is no accident. Its seamless integration into the shopping experience, coupled with the promise of flexibility and instant gratification, makes it irresistibly convenient. But these very features, when combined with behavioral triggers and evident regulatory blind spots, can quickly transform BNPL from a helpful tool into a harmful trap.

As more consumers turn to BNPL not for indulgent purchases but for everyday necessities, the need for clear, coordinated regulation becomes undeniable. Australia and the European Union have demonstrated that it is not only possible, but necessary, to treat BNPL for what it truly is: credit. Their reforms show that consumer protection can evolve without stifling innovation. The United States, by contrast, risks falling behind at a moment when millions of consumers are most exposed.

It’s time to move beyond the reactive mindset in which regulation lags behind innovation. Instead, we need a consumer-centric approach, one that places the public interest at the heart of financial policymaking. In the case of BNPL, financial sector regulators around the world must treat the product with the seriousness it demands and implement safeguards that reflect its true risks.

This blog has focused on some of the wealthiest, most institutionally mature markets in the world, places with longstanding regulatory infrastructures. And yet, even in these contexts, we’ve seen how BNPL has outpaced oversight. The implications for the majority world, where market conduct regulation is still developing, are deeply concerning. It is reasonable to assume that BNPL providers have already moved swiftly into these markets, exploiting similar regulatory gaps and putting consumers at risk. That’s a discussion for another day, and another blog.

For now, I’ll hold on to the memory of when layaway plans helped families budget for purchases they couldn’t yet afford, when waiting was part of the process, not a loophole to bypass. Those days, it seems, are long gone.

At Diana Chacón Consulting, we believe that financial inclusion must not come at the cost of consumer vulnerability. BNPL can serve a useful purpose, but only if the proper safeguards are in place. The conversation must now move beyond convenience toward accountability.