Like many online services, “buy now, pay later” exploded in use during the pandemic. But now many are wondering what the future might hold for this service. While investors have begun to step away from the industry, politicians and regulators have been calling for restrictions on the new service.

For those unfamiliar, the buy now, pay later strategy is a modern twist on putting an item on layaway. Consumers can fill their online shopping carts and then use the option (often provided by fintech companies like Affirm or Afterpay) to pay for purchases through regular installments. Usually, the installments are made over a few months and no interest payments or fees are due so long as payments are made on time. In addition to being online, however, the other major separation from making purchases on layaway is that rather than have to wait, consumers can receive the item after the first deposit is made.

While this innovation in payments has helped many make purchases that were previously out of reach, some have cried foul over the option being too attractive or too novel. Critics argue that people are easily tricked into spending more than they can afford or that the services come with hidden fees. For instance, while no evidence was cited directly in the text, Mac Schwerin recently wrote in the Atlantic: “[Buy now, pay later] programs increase the likelihood of borrowers dipping into their savings and incurring overdraft and other fees.”

Regulators have also expressed concern because the buy now, pay later strategy falls outside the traditional financial regulations that apply to banks and other financial institutions. For example, the Consumer Financial Protection Bureau (CFPB) said that it was concerned because the five companies it surveyed in 2022 did not have standardized disclosures.

Standardized disclosures certainly are not the worst hand for an industry to have dealt by regulators, but it is somewhat unclear what those disclosures will do for consumers and it is likewise unclear how the lack of standardized disclosures has created a problem for consumers. The Financial Health Network found in 2022 that although 43 percent of buy now, pay later users reported having subprime credit scores, only 8 percent of users reported having difficulty making payments or missed at least one payment. It’s only when isolating those with subprime credit and those considered financially vulnerable that the number of users that reported difficulty making payments or missing at least one payment rises to 14 percent and 24 percent, respectively. However, in a separate survey, the Financial Technology Association found that 94 percent of users reported that the terms and conditions of buy now, pay later were easy to understand—seemingly running contrary to the Senate Democrats’ recent warning about hidden fees.

Although buy now, pay later is a new financial service, the treatment from policymakers and critics mirrors progressives’ battles with the payday lending industry. It was only in 2020 when the CFPB officially withdrew “the [2017 Payday Lending] Rule’s determination that consumers do not understand the materials risks, costs, or conditions of covered loans, as well as its determination that consumers do not have the ability to protect their interests in selecting or using covered loans.” As Norbert Michel wrote at the time, “The old rule was driven by over-zealous paternalism and politics, not by evidence or anything resembling an interest in well-functioning financial markets.” Removing it was the right step forward.

Yet now, it seems new CFPB leadership and new technology have officials heading right back down the same old path. As this issue continues to come into focus for policymakers in Congress and agencies alike, let’s make sure that the guiding principle is clear. Regulation should only exist to address market failures and not just for the sake of wrapping products into the existing regulatory system or expanding paternalism into new territories.