CFPB not yet ready to regulate BNPL

A new report from the Consumer Financial Protection Bureau revealed that consumers using buy now, pay later (BNPL) schemes are heavy users of other forms of credit—like credit cards and payday loans—and are more likely to exhibit signs of financial distress than non-users.

But it remains unclear whether regulations specific to BNPL are necessary, the consumer watchdog agency said.

"A common misconception of Buy Now, Pay Later borrowers is that they lack access to other forms of credit," stated CFPB Director Rohit Chopra. "Our analysis shows that these borrowers are more likely to use other credit 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 the same rules."

But Chopra and the CFPB stopped short of calling for outright regulation of BNPL, at least for now. "[M]any differences between BNPL borrowers and non-borrowers pre-date BNPL use," the report noted.

Insights on BNPL users

BNPL is a new twist on an old scheme—layaway plans. Only instead of having an item put on the shelf until its paid off, with BNPL the customer takes possession of the purchase and pays it off in equal installments over a set period of time, usually a month. The credit is free to consumers, provided all payments are made on time. Merchants pay fees to BNPL providers, typically in the range of 4 percent to 8 percent of the ticket total.

Generally, BNPL is not considered a loan, and thus the transactions are not covered by consumer credit laws.

The CFPB's report follows news out of the U.K. that regulators there plan to regulate BNPL companies. The Australian government also has said it intends to regulate BNPL firms.

BNPL took off during the pandemic, especially for ecommerce purchases, and it continues to grow. Research and Markets estimated the global BNPL market is growing at a compound annual rate of 28 percent.

In all, 17 percent of consumers with credit records had used BNPL in the year preceding the CFPB's research, which was conducted in 2022.

Here are further insights into BNPL users, as reported by the CFPB.

• Nearly 95 percent have at least one credit account, compared to 86 percent of non-users.
• They are more likely to use specific loan products than are non-users. For example, 62 percent have retail credit cards compared to 44 percent of non-BNPL customers. They also are more likely to have personal loans (32 percent versus13 percent) and student loans (33 percent compared to 17 percent).
• Black, Hispanic and female consumers are more likely than others to use BNPL.
• Consumers with annual incomes between $20,000 and $50,000 use BNPL more than consumers in other income brackets.
• BNPL customers that have other forms of credit (personal loan, retail cards, auto loans, student loans and mortgages) are twice as likely as non-BNPL customers to be delinquent on one of those credit instruments by at least 30 days.
• BNPL customer delinquency rates are most pronounced for credit card accounts.

The CFPB also found that BNPL customers have substantially lower credit scores than non-customers. "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," the CFPB wrote.

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