CFPB Finds Most BNPL Users Are Not Financially Distressed

BNPL users have relatively few financial safety nets in place should they run into difficulties managing their obligations.

That’s an if and not a when, but borrowers are more financially stretched than non-buy now pay later (BNPL) users.

A new report from the Consumer Financial Protection Bureau notes that many BNPL users use the option without signs of stress. But some signs bear watching.

The CFPB found that there are some advantages of using installment options, particularly for consumers with less than prime credit. BNPL borrowers had an average score in the sub-prime category (credit scores of 580-669).

“Lower credit scores lead to higher interest rates on traditional credit products, which makes Buy Now, Pay Later loans with no interest an attractive alternative that many borrowers seek,” wrote the CFPB.

The report “Consumer Use of Buy Now, Pay Later Insights from the CFPB Making Ends Meet Survey,” says that “a majority of BNPL borrowers would face credit card interest rates between 19% and 23% annually if they had chosen to make their purchase using a credit card.”

Growing Use and Growing Appeal

The CFPB’s findings come a year after and underscore PYMNTS’ own revelations about just who wants to use BNPL and why. In “The Second-Chance Consumer: How Buy Now, Pay Later Creates New Merchant Opportunities, a PYMNTS and Sezzle collaboration, we found that “second chance” consumers (as much as 23% of the population) want to use credit to get what they need — and we note that they are desirable customers for all manner of merchants. Of those consumers, 65% percent earn more than $50,000 per year, with 30 percent earning above $100,000. The average second-chance consumer, we found, has a FICO score of 662, which sits within the aforementioned CFPB range. And of these consumers surveyed by PYMNTS that are using BNPL, 70% say installment, no interest options help them shop without overspending.

PYMNTS data shows that BNPL still has but a small slice of the transaction pie. The payment method has a consistent 1.1% of overall digital transactions. The installment method holds appeal among consumers with lower credit scores. And elsewhere, our data shows that BNPL is relatively more popular with middle-income consumers, who paid for 1.5% of all their retail purchases this way.

What Bears Watching

As for the trends that bear watching: The CFPB finds that many BNPL users have lower liquidity and savings on average compared to consumers who did not use BNPL.

Though most BNPL users and not currently financially distressed, some are. The CFPB found that approximately 25% of BNPL users and non-users alike have “zero credit card liquidity,” but 6% percent of BNPL users compared to 3% of non-users with a credit card have negative liquidity, “meaning that their debt balances on all credit cards are higher than the sum of their credit card limits, indicating particularly high levels of indebtedness among these consumers.”

Drilling down into the data, the CFPB found that BNPL users have, on average, $11,981 less in non-retirement savings and cash compared to consumers who did not use BNPL in the previous year.

“They also have $4,057 less liquidity available on credit cards,” noted the report.

Generally speaking, the CFPB found that BNPL-using respondents had higher levels of credit card debt and rates of credit card utilization compared to non-BNPL users.

They are also likely to use a range of credit options than peers — 95% of BNPL borrowers do so. As many as 18% of BNPL users, the data shows, were delinquent on at least some form of credit product, compared to 7% for non-users. A total of 69% of BNPL borrowers were revolving on at least one credit card.

“The data in this report do not allow us to distinguish the direction of causality — namely whether consumers in distress are more likely to use BNPL, for instance, in order to substitute away from high-interest loans that they already have, or whether BNPL use leads consumers to increase borrowing using other non-BNPL products. This question remains an important area for future research,” said the CFPB.

It’s a coda that signals that only time will tell how BNPL users might ultimately fare.