No draconian rulemaking has yet resulted from the Consumer Financial Protection Bureau's recent
The CFPB said it's developing "interpretive guidance" that would extend many existing consumer credit card protections to BNPL loans. Given that the bureau is contemplating additional, potentially complex rules to protect BNPL and other borrowers, even this lighter touch could chill the hot installment-lending market.
Already some observers are speculating that one of the reasons Apple
"Compliance can be difficult and technically invasive, and with their newly minted Apple Financial Services division on the line, they can't afford to get it wrong," said Patricia Hewitt, principal at PG Research & Advisory Services.
The
The CFPB acknowledged various benefits of these products, which have expanded low-cost credit to millions of consumers since the category's growth surge began at the start of the pandemic. But regulators also flagged various problems the BNPL industry must solve on its own or face a likely crackdown.
"The CFPB's recent advisory doesn't carry the force of regulation, but it does show the internal thinking of the CFPB and is generally a warning shot," said Brad Rustin, an attorney who chairs the financial services regulatory practice at Nelson Mullins, which is based in Columbia, South Carolina.
The regulators' top concerns are the lack of clarity and consistency around fees and repayment plans. But the most significant problem may be the lack of visibility into individual borrowers' overall BNPL loan exposure, and its potential to amplify risks to the broader lending ecosystem.
"Sustained usage is the risk that frequent BNPL usage may threaten borrowers' ability to meet non-BNPL financial obligations, such as rent, utilities, mortgages, auto loans and student loans," the CFPB said in its report.
While some BNPL providers and credit bureaus have discussed
"The CFPB obviously wants to know if consumers are getting themselves into trouble by taking out loans with multiple vendors and how that affects the ecosystem, if no one knows whether a particular prospective borrower is already overextended," said Daniela Hawkins, managing principal at Capco, a financial consulting firm.
The majority of high-turnover BNPL loans are resolved in a matter of weeks, but a growing number of providers offer longer terms with varying interest rates.
In the wake of the CFPB's report, equity analysts have pointed out other bottom-line risks BNPL loans pose.
Virtually all BNPL firms require autopay, putting these loans — 89% of which are connected to users' debit cards — at the top of the bill repayment hierarchy. That could cause consumers to potentially overdraw their bank accounts if they can't meet their financial obligations. And credit card companies also may take a back seat to BNPL loan repayments, said J.P. Morgan analysts in a recent note to investors.
Although consumers are still exhibiting strong demand for BNPL loans, the CFPB's report showed a slight decline recently in the fees BNPL firms earn from merchants for closing sales. The charge-off rate for BNPL loans has also ticked up this year, while the cost of funds for BNPL lenders has risen, J.P. Morgan analysts noted.
"Though not a surprise, the CFPB's report portends more intense regulatory scrutiny at a time when BNPL faces increasing headwinds in the form of rising funding costs, weaker credit performance and heightened competition," said Mike Taiano, senior director at Fitch Ratings, in a press release.
Large BNPL firms mostly see positive aspects to the CFPB's report.
"The CFPB's findings show consumer preference is rapidly shifting away from high-interest credit cards to no-interest BNPL, which promotes responsible spending through short-term repayment plans," said Klarna in a statement after the CFPB's report was released. The Sweden-based BNPL fintech noted that BNPL loan volumes are less than 1% of total credit use in the U.S.
"We are encouraged by the CFPB's conclusions following their review and we will continue to engage with all of our stakeholders as we advance our mission to deliver honest financial products that improve lives," Affirm said in a statement following the report's release.
In the coming months, BNPL lenders can expect the consumer bureau to provide new industry guidelines to protect borrowers from surprises, and requirements to standardize products, said Allison Schoenthal, a partner at Goodwin Proctor and head of the New York-based law firm's consumer financial services litigation and enforcement.
"The CFPB seems more focused here on rulemaking than enforcement, and may be willing to rely on supervision and guidance to ensure there's clarity on late fees and the impact to consumer credit. The CFPB may even encourage
Large buy now/pay later players are likely to reference the CFPB report to see how they might change existing business practices and self-regulate, but what's more concerning is whether smaller players or new entrants will have the same opportunities, she said.
"The upcoming holiday sales season should be very telling as to whether BNPL loans are putting consumers into serious harm and whether it's likely to continue its pace of growth in the current economy," Schoenthal said.
