The writer is former Chair of the FDIC and former Assistant Secretary of the U.S. Treasury for Financial Institutions.

Should government regulators crack down on financial products whose profitability depends on our proclivity to act impulsively? What if the target market consists of younger, less financially sophisticated borrowers, more prone to acting now and thinking later?

That is the question presented by the latest and not-so-greatest fad in consumer finance, called “buy now, pay later” (or BNPL). The newest offering of the fintech industry, BNPL has enabled millions of Gen Zs and millennials to take on the dumbest kind of debt — that which has no benefit other than immediate gratification of a spending itch.

But with stronger regulation — combined with market discipline and consumer education — it could actually morph into something beneficial: a simpler, cleaner, and cheaper alternative to credit cards.

BNPL is a variation of the installment plans of yesteryear, when retailers would let customers spread payments over a period of time to buy big household items (like stoves and refrigerators). But while those were generally thoughtful purchases of goods that families need, the core BNPL product is geared toward smaller purchases of frivolous wants.

That’s not to say that BNPL has no redeeming features if used properly. Young people are drawn to the simplicity of its features (frequently, four, equal installments spread out over a period of six weeks). The nature of their obligation is transparent and straightforward, in contrast to the high interest and mind-numbing small print that accompanies credit cards. And if they pay according to terms, there is typically no interest — though BNPL providers are happy to provide longer payment periods that do carry finance charges.

Many consumers do not use BNPL wisely

Unfortunately, a growing body of research shows that a good percentage of users do not use BNPL wisely. Because decision-making comes at point-of-sale, users do not always take time to reflect on whether they can afford the repayment obligation they are incurring. And BNPL providers make little, if any, effort to determine whether users can afford the purchase (other than a soft credit check).

In addition, many BNPL users lose track of their payment due dates, which typically start two weeks after the date of purchase. Thus, a large number end up missing payments or incurring nonpayment and late fees. There is the added risk that BNPL’s automatic payment feature triggers an overdraft, adding bank fees, as well.

Even worse, some end up using interest-bearing loans or credit cards to make good on their BNPL obligations.

In Australia, where the BNPL market is mature and pervasive, a regulatory study found that 15% of users had to take out another loan to make their BNPL payments, and one in five had to curb spending on essentials to do so. In the UK, where BNPL is also common, a major bank recently reported that 10% of its customers making BNPL payments overdrew their checking accounts in the same month.

Test drive

As a mother of two 20-somethings — target group for BNPL providers — I decided to test drive one of the fastest growing: Klarna, a Swedish-based company recently valued at over $45 billion. My skepticism grew when I saw that the recommended age for the Klarna app was 4 years and up! I loaded the app, linked to Amazon to buy $100 bed sheets and was given two options: pay interest-free in four equal installments over six weeks, or spread out my purchase over six months for an interest charge. Wanting to see what kind of interest rate disclosures Klarna provided, I opted for the latter. After checking my credit score, the app offered a six-month plan with no interest or late fees (though Klarna does charge late fees on some plans). I found Klarna simpler than a credit card to understand. It clearly disclosed the APR and fees, and the interest-free money was a nice feature.

Then again, I already routinely get a few weeks of interest-free money on my credit card, as does anyone who pays off their balances each month in full. And I have no chargeback rights with Klarna — as I do with my credit card.

That said, younger people are notorious for carrying card balances and falling behind on their payments. So if BNPL can provide a better alternative to credit cards for this population, I’m all for it. Studies indicate that BNPL is cutting into the credit card usage.

Regrettably, it may be having an even bigger impact on debit card use, suggesting that many users are now financing consumer purchases that they used to pay for in full. In addition, they are buying more — a lot more. The reason BNPL providers can extend credit interest-free is because retailers pay them dearly for BNPL transactions. Retailers do that because BNPL boosts sales. Some BNPL providers boast that the innovation increases sales by 20% to 40%. If so, retailers are benefitting — at the expense of users’ finances. Many are over-extending: according to a recent study by Credit Karma, one-third of BNPL users have fallen behind on one or more payments.

Regulation?

Instead of replacing credit card debt, I fear BNPL is creating new burdens on the cash flows of young households — ones that already struggle under high levels of student debt, credit card debt, and the rising costs of housing and food (to say nothing of all the entertainment subscription services they love). This is a financially fragile population, consisting of households that have not yet built wealth and a stable earnings capacity. Many also lack sufficient financial understanding and discipline to resist the relentless marketing of BNPL providers. My Klarna app sends me near-daily emails featuring pictures of smiling youthful consumers pushing their retailers’ latest deals.

Should regulators crack down? The UK, Australia, and California have started tightening regulation. House Democrats and consumer groups are pressing the Consumer Financial Protection Bureau (CFPB) to act. The CFPB has a strong, new leader in Rohit Chopra, who cut his consumer-protection teeth as a fierce advocate for college students against abusive lending practices. At a minimum, the CFPB should make sure that BNPL providers are not exploiting any regulatory gaps. Even if the deals are “interest free,” they are still debt and should be subject to comparable protections applicable to unsecured consumer credit. Similarly, BNPL providers should do more to assess a user’s ability to repay the debt. And users should have clear rights regarding cancellation and chargeback rights.

But nanny-state regulation effectively killing the product would be unwise. Credit cards are too complex and costly. Properly regulated, BNPL might evolve into a cleaner alternative. The market itself is already providing incentives for BNPL providers to be more careful in freely lending to consumers. Klarna’s credit losses doubled in the third quarter.

Better financial education would also help. Unfortunately, we do a lousy job of that in the U.S. That is why I write picture book stories for children and their parents about money basics — to help them understand financial behaviors that will cost them money and impede their ability to build wealth.

Coincidentally, one of my most recent, "Billy the Borrowing Blue-Footed Booby," is about a BNPL scheme on the Galapagos Isles. A sly seal convinces a blue-footed booby to finance an umbrella purchase, then encourages him to keep buying frivolous items, as his debt gets bigger and bigger. Children giggle at the silly booby, but they also learn an important lesson about the perils of borrowing more than you can afford, while enriching unscrupulous lenders. Early financial education can help children start learning how to behave like rational adults when it comes to money matters. Because when they grow up, they will confront plenty of sly seals who want them to act like an unbridled child.