CFPB Says Consumers at Risk From BNPL Over-Extension

For buy now, pay later (BNPL), heady growth demands some new guardrails.

The Consumer Financial Protection Bureau report, “Buy Now, Pay Later: Market trends and Consumer Impacts” has been long awaited and debuted Thursday (Sept. 15) with the recommendation that there be new measures put in place to safeguard consumers as they continue to embrace the nascent payment method.

And as for the protections themselves: The CFPB urges that a few pages be taken from the credit card industry’s playbook.

The report itself builds on the data collected since the end of last year when the CFPB issued market monitoring orders to five lenders to provide data on their BNPL loans.

The growth of the BNPL industry overall has been staggering. The CFPB noted in its data that between 2019 to 2021 the number of BNPL loans originated by these five lenders grew by 970%, and the dollar volume grew by more than 1,000% to as much as $24.2 billion.  Approval rates are high, at more than 73% and up from 69% previously.

See also: PYMNTS Intelligence: Leveraging BNPL to Beat the Cost-of-Living Crisis

And, yes, there are consumer benefits in the mix and some notable advantages over traditional credit — “these benefits are both financial (i.e., no interest and sometimes no late fees) and operational (i.e., ubiquitous, easy to access, simple repayment structure),” the CFPB wrote.

As to the harms: The CFPB warned that the BNPL loans are structured in ways that present “operational hurdles” such as the lack of clear disclosures of loan terms, challenges in filing and resolving disputes and the mandate that autopay be used for those loan payments. The report is also cautious on the ways and means of data collection.

Chopra Weighs In

On that last point, CFPB Director Rohit Chopra has said in his own remarks that “we find that Buy Now, Pay Later firms are building business models dependent on digital surveillance. In some ways, these firms aren’t just lenders, they are also advertisers and virtual mall operators. Because they are deeply embedded as a payment mechanism for e-commerce, Buy Now, Pay Later lenders can gather extraordinarily detailed information about your purchase behavior.”

And elsewhere, “overextension” remains a key risk, according to the CFPB’s report:  “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.”

In other words, BNPL adoptees run the very great risk of being stretched too thin. The paycheck-to-paycheck pressures have been well-documented by PYMNTS.

CFPB found that 10.5% of borrowers were charged at least one late fee in 2021, up from 7.9 percent in 2020%. And the lenders’ share of revenues from consumer fees (late fees and other fees) was 13.4% in 2021, up from 11.7% in 2020. Late fees specifically accounted for 6.9% percent of revenues in 2021 (up from 4.8 percent in 2020), according to the stats.

There’s a particular risk in loan stacking, said the agency: “BNPL lenders often point to their low-and-grow strategies of assigning low credit amounts to first-time borrowers that slowly increase over time with on-time payments as evidence of appropriate usage guardrails. However, these guardrails can erode if borrowers have access to concurrent BNPL loans from several lenders.”

And yet: In contrast to the above findings by the CFPB, PYMNTS’ own data finds that most BNPL users think of BNPL as an alternative payment method rather than a form of credit.

The most important reason why BNPL users use the payment offering is that it allows them to purchase products they would not have been able to purchase otherwise (18% of BNPL users said this). The ability to better manage personal cash flows and paying for purchases more easily are the two next-most important reasons why BNPL users use this method (14% each).

And drilling down into the details, we find that “smart money prime” users — with relatively high scores (Prime scores are between 660 to 719)  that have embraced BNPL — find particular value in using the payment method.  Some 54% of those users live paycheck to paycheck but do not have issues paying bills.  “Smart money subprime” users, too, use the BNPL methods responsibly (and 45% of that latter group have incomes under $50,000 annually).

See also: 71% of Affluent BNPL Users Increased Their Use in Last 12 Months

It’s important to note, of course, that these borrowers — savvy and judicious with their money and with relatively solid credit profiles, have a range of borrowing options available to them.  But they opt for BNPL due to the predictable nature of their installment obligations.

What Comes Next

As to what comes next: Chopra’s remarks note that companies have been “slow to develop mature credit reporting protocols … mortgage lenders and auto lenders have raised concerns to me that the growth of Buy Now, Pay Later with no associated credit reporting makes it more challenging to know whether a borrower can afford a mortgage or auto loan. The Buy Now, Pay Later firms themselves also may have no idea how many other loans a consumer may have with other Buy Now, Pay Later providers.” The BNPL lenders, he said, should “incorporate the protections and the protocols that we observe in other products,” and thus set a baseline level of protection.

Chopra has noted that many BNPL lenders “are not offering the same clear set of dispute protections that credit card issuers have long been required to offer, which is creating chaos for some consumers when they return their merchandise or encounter other difficulties. Many Buy Now, Pay Later lenders do not offer clear and comparable disclosures of the terms of the loan like other lenders.”  Similarly, he said that the agency would be looking at how the credit card issuers themselves are incorporating BNPL features into their own products.

Those comments, of course, offer a bit of roadmap as to what may be in the offing for BNPL lenders as time goes on — and one thing is certain: There’ll be some changes made.