Buy Now, Pay Later: Market trends and consumer impacts

• Context
• The study
• Key findings
• Points to consider

Context

Consumers have long used credit to purchase goods and services and, since the mid-2010s, an alternative short-term credit product has risen in prominence in the United States of America (and other developed economies) known as ‘Buy Now, Pay Later’ (BNPL). BNPL allows a consumer to split a typical retail purchase valued at $50 to $1,000 into four smaller, interest-free instalments, the first of which is paid at purchase with the rest being repaid over six weeks. BNPL lenders typically charge late fees, at around $7 per missed payment on an average loan size of $135.

Despite its rapid growth, the BNPL sector is less transparent than more traditional credit products, due to only limited public data and that repayment against BNPL loans is not reported to Nationwide Consumer Reporting Companies (credit reference agencies, such as Equifax, Experian, and TransUnion) – which could impact consumers and the credit reporting system more generally in future.

The study

In December 2021, the Consumer Financial Protection Bureau (CFPB) issued market monitoring orders to request data from five of the lenders which offer BNPL loans in the US: Affirm, Afterpay, Klarna, PayPal, and Zip (formerly Quadpay).

The orders comprised detailed qualitative and quantitative questions seeking an in-depth view of the lenders’ U.S. BNPL-specific businesses from 2019 to 2021. Topics covered included loan volumes, revenue and expense figures, strategies and policies on underwriting, repayment, late fees, and product disputes.

This report primarily summarises data submitted in response to the market monitoring orders – supplemented by individual and organizational submissions to the CFPB in response to a BNPL-specific public request for comment, depersonalised complaints filed with the CFPB’s Consumer Complaint Database and publicly available source materials – with the aim of assessing BNPL’s marketplace importance and its consumer impacts in the US.

Key findings

• Industry metrics: From 2019 to 2021, the number of BNPL loans originated in the US by the five lenders surveyed grew by 970%. The industry mix of BNPL usage is diversifying.
• Loan metrics: In 2021 (compared with 2020):
  • 73% of applicants were approved for credit (vs 69%).
  • $135 was the average purchase amount financed by a BNPL loan (vs $121).
  • 10.5% of borrowers were charged at least one late fee (vs 7.8%).
  • 13.7% of individual loans had at least some portion of the order that was returned (vs 12.2%).
• 3.8% of borrowers had a loan that was charged off (vs 2.9%), where ‘charge off’ is the lender’s designation that a severely delinquent debt has a very low expectation of collecting on.
• Competitive benefits of BNPL: There are both financial and operational benefits to BNPL, such as no interest and ease of access.
• Consumer risks: Several potential consumer risks identified in the study relate to three broad themes: discrete consumer harms that relate to undesirable operational hurdles; data harvesting practices which may compromise individuals’ privacy and autonomy and contribute to overextension risks; overextension which can contribute to loan stacking and sustained usage.

Points to consider

• Methodological strengths/weaknesses: The authors note a lack of individual-level data received from the market monitoring orders which meant that credit performance could not be assessed for individual borrowers across lenders or over time and that impacts on individuals’ current accounts could not be assessed. Demographic indicators from these data were largely absent and it was not possible to assess the structural soundness of lenders’ lending models.
• Applicability: The authors note that the review is limited to BNPL products defined by repayment in four instalments (the ‘pay-in-four’ product), and therefore may not be applicable to other products.
  • Although of the findings may be broadly applicable to other geographical jurisdictions, the ‘pay-in-four’ product is not typical of the BNPL product structure that is currently offered in the UK.
• Generalisability/transferability: Only five BNPL lenders were covered by the monitoring order, and it is not clear from the report why these were selected or how representative they would be. The authors note that the data are likely to be representative of the ‘pure-play’ BNPL industry (that is, non-bank tech companies that offer BNPL) as a whole in the US but cannot be used to “definitively project the overall size” of the BNPL market in the US (p.8).