My October 3 post on the Consumer Financial Protection Bureau's (CFPB) 2022 report 
on the buy now, pay later (BNPL) industry highlighted some of the key metrics from the CFPB's data collection efforts of the five major BNPL operators in the United States. In this post, I review some of the benefits, concerns, and planned actions identified in the report.
The report acknowledges several financial benefits of the "pay-in-four" BNPL loans to the consumer—primarily that they don't charge interest, which makes them an attractive alternative to other forms of credit. For example, the report cites data from a 2021 report on the consumer credit card market : the cost of credit in 2020 for revolving cardholders using general purpose cards was 17.7 percent.
The main sales pitch that BNPL firms present to the merchant is that BNPL increases the potential for incremental sales; with this option, the customers may purchase a more expensive product or additional products. While the CFPB report does not have any specific metrics on incremental sales, it does cite a number of claims from the BNPL firms about how BNPL could increase average sales amounts and attract new customers. The report mentions another benefit for merchants: the BNPL firm providing the credit assumes all the risk of nonpayment. As I mentioned in my earlier post, the firms reported that 3.8 percent of loans were charged off in 2021—up from 2.9 percent in 2020.
Any extension of credit risks consumers assuming more debt than they can afford. In particular, the report cites "loan stacking" as a possible danger. Loan stacking occurs when the customer obtains multiple BNPL loans from different lenders, "stacking up" the payment obligations of each loan on top of one another. BNPL firms try to minimize this danger by limiting initial loan amounts. However, since most BNPL providers don't report loan activity to the major credit reporting agencies, they can't know how many BNPL loans the consumer may have gotten from other BNPL firms and, therefore, they have no knowledge of the consumer's full debt. This concern is increased by the trend shown in the data that the repeated use of BNPL has increased over the last three years. In the fourth quarter of 2021, the five lenders surveyed reported an average usage rate per unique customer of 2.8 loans used during the quarter. This figure only reflects the number of loans with a particular lender. In the first quarter of 2019, this average was 1.9 loans.
Besides the risk of credit overextension, the report details other potential harms, including:
- a lack of clear and consistent disclosures
- inconsistent practices regarding merchandise disputes
- mounting late fees and bank fees for multiple representments of returned payments
- the requirement to use autopay or the difficulty in selecting another payment method
- the use of customer data for purposes other than handling the transaction
The next question is this: With this data in hand, what does the CFPB plan to do about rules or guidance for the BNPL industry? In a prepared statement issued in conjunction with the report's release, CFPB director Rohit Chopra outlined several actions the organization would take immediately, including continually monitoring the BNPL industry. The CFPB staff will identify potential guidance or rules that will require the same consumer disclosures and protection that credit cards are subject to. The CFPB will continue to encourage the development of processes for BNPL firms to work with the credit reporting agencies so that loan experiences are reported regularly and accurately and a consistent methodology is used to estimate the debt burden of a household.
The execution of supervisory examinations has been inconsistent due to the variety of the business structures of the BNPL firms. The CFPB is encouraging voluntary examinations but is also looking into its authority to mandate examinations. Related to consumer data protection and privacy, the CFPB plans to work with the Federal Trade Commission on developing rules that will be applicable to all businesses regarding using data for something other than the BNPL transaction itself.
While the BNPL industry is in its early stages, it is becoming a major part of the retail credit landscape. We will continue to follow and report on developments in this industry.
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed