CFPB’s Buy Now, Pay Later Stance Should Comfort Banks, Credit Unions

Banks and credit unions interested in offering Buy Now, Pay Later (BNPL) services should be pleased with the latest report from the Consumer Financial Protection Bureau (CFPB).

Many FIs have been reluctant to dive into the popular consumer offering, largely due to uncertainty over the regulatory environment. SRM asserted in a recent report that banks and credit unions have the experience and tools necessary to handle regulatory scrutiny.

The CFPB finally weighed in on the issue last week, issuing a report based on data collected from BNPL providers, including Affirm, Afterpay, Klarna, PayPal, and Zip. The data revealed those lenders originated 180 million loans totaling more than $24 billion in 2021 – a tenfold increase from two years earlier.

The agency also observed that customers could receive “uneven disclosures and protections” while making it clear that companies that provide BNPL services should treat the product like credit cards.

BNPL “is a rapidly growing type of loan that serves as a close substitute for credit cards,” CFPB Director Rohit Chopra said in a press release associated with the report. “We will be working to ensure that borrowers have similar protections, regardless of whether they use a credit card or a Buy Now, Pay Later loan.”

CFPB Outlines Its Concerns

The agency raised three concerns regarding BNPL products:

• Inconsistent consumer protections
• Data harvesting and monetization
• Debt accumulation and overextension

As a result, the CFPB said it plans to “identify potential interpretive guidance or rules” to ensure that BNPL lenders stick to the same baseline protections established for credit cards. The agency also plans to identify the data surveillance practices that BNPL lenders should avoid.

The good news for banks and credit unions is that, by and large, they have the compliance infrastructure in place to satisfy any requirements outlined by the CFPB. FIs that already offer credit cards are in a good position to add BNPL as another payments tool.

With this regulatory clarity, FIs can focus on the underlying credit risk. We recently shared our views on how to firewall that risk, using many commonplace methods for banks and credit unions.

Other Key Findings

The CFPB study yielded other nuggets that should interest banks and credit unions on the fence about offering BNPL products.

The agency found that most BNPL loans range from $50 to $1,000. Apparel and beauty merchants led the way when BNPL debuted and accounted for 59% of originations in 2021 (down from 80% in 2019).

The CFPB also found that:

• Loan approval rates rose from 69% in 2020 to 73% last year
• 10.5% of unique users were charged at least one late fee in 2021, up from 7.8% in 2020.
• Profit margins fell from 1.27% of the total amount of loans originated in 2020 to 1.01% last year 

The Bottom Line

BNPL is a fast-growing consumer lending product, reaching many Americans who might otherwise be leery about financial products, the CFPB found. SRM maintains that FIs should look at the product as a way to reach new customers and defend against fintechs that will eventually offer more-traditional loans to BNPL customers.

The CFPB’s stance that BNPL products are akin to credit cards should bring some incremental comfort, providing a glimpse into the agency’s thinking and insight into the examination process.

Most banks and credit unions have the processes in place to comply, and some methodologies can mitigate losses. The other major hurdle involves carefully determining third-party providers and merchant partners. SRM will continue to monitor any developments in this space.