The Consumer Financial Protection Bureau (CFPB) has published a report on the buy now – pay later (BNPL) industry, criticizing the sector of Fintech as having “uneven disclosure and protections” for borrowers. The CFPB noted that BNPL rocketed higher by almost 10X the amount in 2019 of $2 billion to 180 million loans totaling $24 billion in 2021.
While the credit service started as a service mainly for durable goods, today consumers have access to BNPL for daily purchases – such as groceries and gas. The average purchase value in 2021 was $135, up from $121 in 2020. BNPL usage for everyday transactions is reported at $229.2 million in 2021 (0.9% of Gross Merchandise Volume, or GMV), up 434% from $42.9 million in 2020, and up 1,207% from $3.3 million in 2019.
The CFPB states that the BNPL industry is dominated by five participants: Affirm, Afterpay, Klarna, PayPal, and Zip.
CFPB Director Rohit Chopra said the agency will be working to ensure that borrowers have protection whether they use a credit card or a BNPL loan, foreshadowing more regulation to the online lending segment.
While the report notes certain competitive benefits of BNPL, IE no interest, easy access, and simplicity. The document states, “the fact is that BNPL imposes significantly lower direct financial costs on consumers than legacy credit products.”
Meanwhile, much of the document points to potential problems with BNPL, including:
- Discrete consumer harms. The BNPL product is often structured in ways that may present borrowers with undesirable operational hurdles, including the lack of clear disclosures of loan terms, challenges in filing and resolving disputes, and a requirement to use autopay for all loan payments.
- Data harvesting. Similar to many other large tech platforms, BNPL lenders often collect consumer data—and deploy models, product features, and marketing campaigns based on that data—to increase the likelihood of incremental sales and maximize the lifetime value it can extract from each current, past, or potential borrower. These practices (which may become even more prevalent and profitable as third-party data tracking becomes more difficult on iOS6 and Android7 operating systems) may compromise consumers’ privacy and autonomy and contribute to the overextension risks described below.
- Overextension. The BNPL business model may encourage overextension, and in doing so present a pair of risks: loan stacking, which can cause borrowers to take out several loans within a short time frame at simultaneous lenders; and sustained usage, in which frequent BNPL consumption over a period of months and years may affect consumers’ ability to meet non-BNPL obligations.
Of course, each of these issues may also be characteristic of traditional credit offerings such as credit cards.
The report states that four of the five lenders utilized credit profiles and credit scores as part of their process of underwriting new and returning applicants. For returning BNPL borrowers, all five BNPL firms supplement the credit approval decision with the applicants’ prior repayment history with that lender.
These lenders also use “additional data sources” to underwrite higher risk segments and one requires applicants to verify funds in a checking account by using an open banking process.
The vast majority of payments for loans come from debit cards (89% in 2021) with 10.1 percent coming from credit cards leading to claims of “hidden” expenses.
Three of the lenders charge a late fee for a missed payment – either a flat or a percentage charge.
Following the report, CI received a comment from Basant Singh, Global Head Product & Merchant Segment, at ACI Worldwide, a payments provider. He is of the opinion that BNPL is here to stay, and so regulation is needed to protect consumers.
“Buy-Now-Pay-Later (BNPL) regulation is good for the industry and long overdue. BNPL providers have a responsibility to society and business to provide good lending, so the CFPB planning to tighten up BNPL regulations is a great CSR move for B2C BNPL in the US … It’s become the first choice for many consumers, due to being an easy and convenient solution for customers, merchants, and providers. Regulation is designed to protect consumers, hold industry players to account and ensure they continue to adhere to best practices. In order to achieve this, we also need to see regulation step in and also address these concerns for B2B BNPL in the UK and Europe as well.”
In contrast to the CFPB document, the Financial Technology Association (FTA) posted a survey on BNPL that highlighted some positives. The FTA is a lobbying group that represents Fintechs including online lenders like BNPLs. The survey claimed that 94% of adults who utilize BNPL indicate they understand the terms and conditions of using the service.
The CFPB is gearing up to regulate BNPLs so it is more a question of when, not if. And then, what the Bureau will do and draconian the requirements may be.