CFPB Issues Analysis on Consumers of Buy Now, Pay Later Products

As we reported here, late last year, the Consumer Financial Protection Bureau (CFPB) signaled that it planned to increase scrutiny of the Buy Now, Pay Later (BNPL) industry and issued its first report about BNPL. Yesterday, the CFPB issued a report exploring the financial profiles of BNPL borrowers. According to the CFPB, on average, BNPL borrowers were much more likely to be highly indebted, revolve on their credit cards, have delinquencies in traditional credit products, have lower credit scores, and use high-interest financial services such as payday, pawn, and overdraft compared to non-BNPL borrowers. However, many of these differences pre-dated borrowers’ BNPL use and the increased availability of BNPL products might offer a less expensive borrowing option for many of these users.

BNPL products are a form of credit that allows a consumer to split a retail transaction into smaller, interest-free installments and repay over time. The typical BNPL structure divides a $50 to $1,000 purchase into four equal installments. While BNPL credit is generally interest free, providers make money by charging fees to both sellers and consumers who don’t pay on time. Launched in the mid-2010s as an alternative form of short-term credit for online retail purchases, BNPL loan usage increased ten-fold during the pandemic. Offerings marketed as BNPL have since grown to include a varied range of credit products, but for purposes of this report, BNPL refers exclusively to zero-interest, pay-in-four (or fewer) installment point of sale loans — the same product parameters that were the focus of the CFPB’s December 2021 BNPL market monitoring orders and subsequent September 2022 report.

For this report, the CFPB used consumer responses to the 2022 Making Ends Meet survey as well as an anonymized sample of credit bureau records. Among other takeaways from the report, the CFPB found:

• On average, 17% of consumers borrowed using BNPL at least once in the prior year. Black, Hispanic and female consumers and those with household income between $20,001-50,000 were significantly more likely to use BNPL products compared to white, non-Hispanic and male consumers, or those with household income below $20,000.
  
  
• BNPL borrowers have lower average credit scores than consumers who did not borrow using BNPL. They were also 11 percentage points more likely to have a delinquency of at least 30 days on their consumer report.
  
  
• Users of BNPL products exhibit measures of financial distress that are significantly higher than non-users. For example, BNPL borrowers have higher credit card debt and utilization rates, a higher likelihood of having an overdraft, a higher likelihood of revolving on at least one credit card (meaning that they carried over a credit card balance from one billing cycle to the next), and higher utilization rates of alternative financial services that charge high interest rates.

However, the report concluded by noting that the majority of BNPL users have access to traditional credit. In fact, for users with revolving credit card debt where the interest rate starts immediately, credit cards purchases are much more expensive. Zero-interest BNPL loans appear to be a less expensive borrowing option, not the only option for the majority of users.

In the CFPB press release announcing yesterday’s report, Director Chopra’s remarks unmistakably signal his intent to regulate BNPL with the same rigor that he has applied to more traditional products: “Since Buy Now, Pay Later is like other forms of credit, we are working to ensure that borrowers have similar protections and that companies play by similar rules.”