New paper reveals challenges of growing BNPL industry for all involved

The paper ‘Grow Now, Regulate Later’ notes that globally, BNPL products are expected to account for USD 680 billion in transactions by 2025 or about 12% of all ecommerce sales on goods. This growth is being driven primarily by younger consumers, with two-thirds of BNPL borrowers falling into the subprime category, making them vulnerable to negative changes in the economy.

At the same time, the unprecedented nature of the industry and lack of oversight makes it difficult to properly evaluate the risks, including significant subprime borrowing and total consumer debt burden. While there are many good actors and the industry offers access and convenience for consumers, it is naturally engaging in what the institution calls ‘regulatory arbitrage’ which has allowed it to generally avoid the kind of oversight required of credit card companies, banks, and other traditional lenders. 

Despite its significance, the US BNPL market currently exists in what the paper calls ‘a legal gray space,’ largely because it can be so difficult to categorise segment products. In December 2021 concern about the industry prompted the Consumer Financial Protection Bureau (CFPB) to issue information collection orders to leading BNPL companies to assess the ‘risks and benefits (to consumers) of these fast-growing loans.’ This is expected to lead to future actions but, the authors note, many consumers are struggling with their debts already.

As cited in the Wall Street Journal, emerging signs may be a harbinger of trouble. Subprime credit spreads are widening, and short sales on BNPL stocks are increasing. While yield premiums on bonds and short interest represent short-term patterns, they nonetheless suggest the market’s apprehension about the future of some subprime credit products, including BNPL.