Installments at Checkout: The CFPB’s Insight into BNPL Programs
Opportunities, Pitfalls, and the Future of Pay-in-Four Financing
The information supplied below is the result of the study by the CFPB and reported September 15, 2022.
This is just one small fraction of what the CFPB did for us.
The Consumer Financial Protection Bureau (CFPB) study investigates the rapid expansion and impact of Buy Now, Pay Later (BNPL) programs on consumers and the financial ecosystem. BNPL programs offer consumers short-term installment loans—typically splitting payments into four equal installments over several weeks, with the first payment often made at checkout.
Key Findings:
Explosive Growth:
BNPL usage has skyrocketed, particularly among younger consumers (Millennials and Gen Z), driven by the rise of e-commerce and the appeal of interest-free installments.
BNPL providers reported massive year-over-year increases in loan volumes, number of users, and dollar amounts of transactions.
Business Model and Operations:
BNPL firms earn revenue primarily through merchant fees, which can be higher than traditional credit card processing fees.
Providers often partner with major online and in-store retailers, embedding BNPL as a payment option at checkout.
Unlike traditional lending products, BNPL firms tend to operate outside of existing consumer protection frameworks like the Truth in Lending Act.
Consumer Behavior:
Consumers frequently use BNPL for discretionary purchases such as apparel, electronics, and beauty products.
The service appeals to those seeking budget flexibility, avoiding credit card interest, or lacking access to traditional credit.
Risks Identified:
Debt Accumulation: Many consumers use multiple BNPL providers simultaneously, leading to risks of overextension and financial strain.
Limited Disclosures: BNPL terms are not always clearly communicated, and providers may not perform thorough credit checks.
Data Usage Concerns: Some BNPL companies leverage consumer data for targeted marketing, raising privacy issues.
Dispute Resolution Gaps: Unlike credit cards, BNPL purchases might lack robust protections for chargebacks or disputes with merchants.
Regulatory Considerations:
The CFPB signals a growing focus on overseeing BNPL services, with potential future actions aimed at enhancing transparency, improving consumer protections, and ensuring fair lending practices.
The Bureau expresses concern that BNPL could behave more like a credit product but without being subject to the same regulatory oversight.
Conclusions:
The study calls attention to the need for policy development to safeguard consumers as BNPL continues to reshape the credit landscape. It also stresses the importance of educating consumers on the financial implications of BNPL use and the potential pitfalls of unregulated credit expansion.
