Compliance Blog

What better distraction is there from wedding planning than a breakdown of the Consumer Financial Protection Bureau’s (CFPB) market report on BNPL lenders and products? The CFPB recently filed a market report summarizing data collected, following the issuance of market monitoring orders in December 2021 under its authority found in section 1022(c)(4)(B)(ii) of the Dodd-Frank Act. The report, issued in September, reviewed market practices and identified benefits of Buy Now, Pay Later (BNPL) loans “over legacy credit products” as well as risks posed to consumers who use BNPL products. The report reviewed the practices of BNPL companies that fit a specific definition. The CFPB defined BNPL products as either “pay-in-four” or “split pay” products, meaning “a four-installment, no-interest consumer loan, typically with a down payment of 25 percent and the remaining three instalments due in two-week intervals. The CFPB excluded point-of-sale installment loans and post-purchase credit card installment plans from this definition. In addition, the CFPB acknowledged that its market report is not comprehensive and may have several limitations. For example, the market report covers only the pay-in-four products and is focused on what the CFPB calls the pure players: nonbank tech companies that offer BNPL.

Consumer Metrics

The report first explored BNPL lenders’ practices such as customer acquisition models and underwriting requirements. The BNPL lenders that were the focus of this market report acquire customers through what the CFPB calls the “merchant partner acquisition model” and the “app-driven acquisition model.” The merchant partner acquisition model permits “lenders [to] sign contracts with specific online retailers to embed their product on the retailers’ checkout pages.” On the other hand, an app-driven acquisition model gives consumers access to “a virtual shopping mall of merchants to patronize…along with a purposed credit amount provided by the lender.” During the customer acquisition process, BNPL applicants are asked to provide their name, address, phone number, email address, and date of birth, with some lenders asking for the last four digits of applicants’ social security numbers. Several BNPL lenders also use consumer credit profiles and credit scores as part of the underwriting process. However, the market report highlights that some commentators have complained that most BNPL underwriting processes do not have other traditional calculations such as ability to pay.

Market Metrics and Trends

The market report found credit losses among BNPL users have “mirrored credit trends in similar lending sectors,” such as personal loans. The report maintains the trends are a “correction back to pre-covid-19 levels, as government stimulus programs that buoyed consumers’ balance sheets” have ended. While delinquencies and charge-offs have increased, the market report concluded consumer usage and interest in BNPL has not subsided and may even show that BNPL is not a ‘fad.’

BNPL and Consumer Financial Health

The CFPB weighed the benefits and risks of BNPL products. One benefit is BNPL products are generally no-interest products while the CFPB estimates American consumers pay nearly $120 billion per year in fees and interest for normal credit cards. Another potential benefit is the accessibility of the product. The report cites “[a] short list of required user inputs; [a]n instantaneous credit decision, [and] [a] high credit approval rate” as some reasons for easy accessibility.

While a consumer may benefit from BNPL products, this does not mean there are no downsides to BNPL. According to the market report, “data points suggest that many BNPL consumers may not be simply shifting their existing purchases to a new payment platform; they may be spending (and borrowing) more than they otherwise would.” This risk may be exacerbated when a consumer participates in “loan stacking,” which occurs when “the borrower takes out concurrent BNPL loans at different lenders and is unable to repay some or all of them.” Another risk BNPL raises is “sustained usage.” A borrower faces this risk when “frequent usage may threaten borrowers’ ability to meet non-BNPL financial obligations.” The report highlights that while this risk is not endemic to only the BNPL products, data suggests BNPL products may amplify the risk.

Takeaways and Risks

The market report continued in identifying several other risk areas tied to BNPL products. Some of these risk areas are a lack of standardized disclosures, insufficient dispute resolution available to the consumer, and the requirement to use autopay. Another risk identified by BNPL products is “multiple payment re-presentment.” These occur when BNPL lenders attempt to reauthorized failed payments. Late fees are also a risk that may arise with the use of BNPL products. The market report also highlighted the potential risk of BNPL products harvesting consumer data.

Check out the full report here for all of the metrics and graphics associated with the study, and further details regarding the Bureau’s findings.

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