On September 15, 2022, the Consumer Financial Protection Bureau released a report analyzing trends in the buy it now, pay later (BNPL) industry. In particular, the CFPB finds that the BNPL industry has grown rapidly since 2020 and that while BNPL products offer some benefits to consumers, the bureau believes that borrowers receive uneven consumer information and protections when they use these products.
CFPB reports BNPL lending trends
Based on data collected between 2020 and 2021, the CFPB reports:
- A 4% increase in the percentage of applicants whose credit was approved.
- An increase of $135 in the average purchase amount financed by a BNPL loan.
- A 2.6% increase in the percentage of borrowers who were charged at least one late fee each year – these late fees representing an additional 1.9% of lenders’ revenue over this period and an overall increase of 1. 7% of lender revenue attributable to consumer charges.
The CFPB identifies the competitive advantages of BNPL loans
The report identifies potential benefits in two categories.
- Ease of use: BNPL products are easy to use and accessible, have a high credit approval rate and provide an instant credit decision. The reimbursement structure is simple and straightforward for consumers to understand.
- Product discovery: The app-based acquisition model serves as a discovery engine that helps users navigate numerous products and brands through a process that, over time, adapts to the interests of the individual user.
CFPB concerned about potential consumer risks of BNPL loans
The CFPB is concerned about potential risks to consumers in three broad categories, as listed below.
Lack of consistent consumer protections
The CFPB affirms its belief that the information provided to consumers wishing to use BNPL products is inconsistent from one supplier to another, particularly with regard to loan conditions, the cost of credit, the resolution of disputes and the obligation to use automatic payment for loan repayment. Specifically, the CFPB concludes that dispute resolution, which is the top category of BNPL-related complaints in the CFPB’s Consumer Complaint Database, presents barriers to consumers and may result in financial harm, as consumers are obligated to pay the remaining installments while the resolution of a dispute or a product return is in progress.
The CFPB also affirms its belief that BNPL lenders often collect consumer data and monetize it, increasing the maximum lifetime value that can be extracted from a consumer through other product features and marketing campaigns. In particular, the CFPB is concerned that data collection has been maximized by lenders’ adoption of an app-based acquiring model in which consumers complete their application on the proprietary app of the lender – an evolution that leads many executives to view BNPL’s products as evolving into marketing functions. In his statement on the report, CFPB Director Rohit Chopra said the bureau would begin coordinating with the Federal Trade Commission on its proposal to regulate data collection. Chopra believes that the FTC’s data collection rules, once finalized, will be enforced by the CFPB in the financial services arena.
The CFPB report indicates that BNPL’s business model may encourage consumers to take on excessive debt by accumulating multiple loans over a short period and/or taking out loans over an extended period, which may impact the ability of consumers to comply with obligations unrelated to BNPL. Additionally, the report finds a significant increase in purchase sizes enabled by BNPL products – with consumers often buying 50% to 80% more than they would if paying through other means. Thus, the CFPB sees potential overextension in two directions: consumers are not only making more purchases than normal, but also spending more on each purchase.
Focus on the regulatory landscape
Chopra also said the CFPB will ensure that borrowers have similar protections to credit card consumers, whether their purchases are made with a credit card or a BNPL loan. For example, the report refers to the following regulations currently applicable to credit card issuers that can logically be applied to BNPL loans:
The absence of advance notice of proposed rulemaking from the CFPB would suggest that a formal rule is still a long way off. In Congress, BNPL remains an area of interest, with frequent questions to Chopra from lawmakers and a hearing on the issue in November 2021. Lawmakers generally reflect Chopra’s concerns regarding:
- Unsustainable debt.
- Lack of Adequate Disclosure or Notice to Consumers.
- Consumer credit reports.
- Consumer data privacy, control and security risks.
However, no notable BNPL bills have been introduced to this Congress.