The Consumer Financial Protection Bureau (CFPB) plans to issue guidance to oversee Buy Now, Pay Later (BNPL) vendors and have them complete supervisory exams in line with credit card company reporting requirements.
In the course of its investigation, the CFPB said that it found BNPL vendors are approving more customers for loans – 73% in 2021 compared with 69% in 2020 – and that delinquencies on these services are rising sharply. Meanwhile, the BNPL industry’s charge-off rate, or the rate of uncollectible loans, was 2.39% in 2021 – up from 1.83% in 2020.
Late fees are also climbing. The CFPB found that 10.5% of customers were charged at least one BNPL late fee in 2021 versus 7.8% in 2020.
Other dangers of BNPL offerings could include data harvesting and taking on multiple large loans at once. These will likely become more acute as people begin to use BNPL for routine expenses; the CFPB found that BNPL customers are increasingly paying for purchases like groceries and gas, spurred by macroeconomic pressures, including inflation.
The Financial Technology Association, an industry trade group, pushed back against the allegations that BNPL could harm consumers if left unregulated, arguing that BNPL as it exists today provides an alternative to other lines of credit.
Some data would suggest otherwise, with a DebtHammer poll showing that 32% of customers skip out on paying rent, utilities, or child support to make their BNPL payments, and BNPL services can also lead to bigger purchases.
According to a study by Credit Karma, 34% of consumers who used BNPL services fell behind on one or more payments. Of those, younger shoppers were far more likely to fall behind, with more than half of Gen Zers and millennials reporting they missed a payment versus 22% of Gen Xers and just 10% of baby boomers.
Late payments can result in fees or even put customers on debt collection lists depending on the terms of the BNPL provider. The Credit Karma survey found that 72% of those who missed a payment said they thought their credit score dropped as a result. One out of three in that group said their credit score declined significantly.
The BNPL industry has flirted with regulations for some time, with the UK announcing new regulatory policies for BNPL companies. California sued Afterpay after it initially refused to obtain a lender’s license from the state. Elsewhere, Massachusetts regulators entered into a consent agreement with Affirm after allegations that it engaged in loan servicing activity without a license.
Several Asian countries are looking to regulate the framework for the issuance of consumer credit (Malaysia and Singapore being just two recent examples). In the US, the CFPB is keeping a close eye on consumer credit products. A probe announced in December 2021 asked major players Affirm, Afterpay, Klarna, PayPal, and Zip to provide insights into the risks and benefits of their products, promising to take the data and translate it into a bill that would level the playing field between alternative lenders and banks, while flattening the overall ecommerce debt ushered in by BNPL in the country.
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