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Sept. 15, 2022

CFPB Study Details the Rapid Growth of “Buy Now, Pay Later” Lending

Business model relies on data collection, and loans serve as close substitute for credit cards

WASHINGTON, D.C. — Today, the Consumer Financial Protection Bureau (CFPB) published a report offering key insights on the Buy Now, Pay Later industry. The report, Buy Now, Pay Later: Market trends and consumer impacts, finds that industry grew rapidly during the pandemic, but borrowers may receive uneven disclosures and protections. The five firms surveyed in the report originated 180 million loans totaling over $24 billion in 2021, a near tenfold increase from 2019.

“Buy Now, Pay Later is a rapidly growing type of loan that serves as a close substitute for credit cards,” said CFPB Director Rohit Chopra. “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.”

Buy Now, Pay Later is a form of interest-free credit that allows a consumer to fully purchase a product, and then pay back the loan over four installments, with the first installment typically being a down payment on the purchase. Most Buy Now, Pay Later loans range from $50 to $1,000, and are subject to late fees if a borrower misses a payment.

Buy Now, Pay Later rose to prominence in the past decade as an alternative form of credit for online retail purchases. The lending option has gained traction with consumers who seek the flexibility of being able to pay for goods and services over time, but who may have been leery of other credit products.

Once a niche financial offering that was heavily concentrated in apparel and beauty, Buy Now, Pay Later has now branched out to industries as disparate as travel, pet care, and even groceries and gas. Apparel and beauty merchants, who had combined to account for 80.1% of originations in 2019, only accounted for 58.6% of originations in 2021.

Other highlights of Buy Now, Pay Later loan usage include:

• Loan approval rates are rising: 73% of applicants were approved for credit in 2021, up from 69% in 2020.

• Late fees are becoming more common: 10.5% of unique users were charged at least one late fee in 2021, up from 7.8% in 2020.

• More purchases are ending in returns: 13.7% of individual loans in 2021 had at least some portion of the order that was returned, up from 12.2% in 2020.

• Lenders’ profit margins are shrinking: Margins in 2021 were 1.01% of the total amount of loan originated, down from 1.27% in 2020.

The marketing of Buy Now, Pay Later loans can make them appear to be a zero-risk credit option, but today’s report identified several areas of risk of consumer harm, including:

• Inconsistent consumer protections: Borrowers seeking Buy Now, Pay Later credit may encounter products that do not offer protections that are standard elsewhere in the consumer financial marketplace. These include a lack of standardized cost-of-credit disclosures, minimal dispute resolution rights, a forced opt-in to autopay, and companies that assess multiple late fees on the same missed payment.

• Data harvesting and monetization: Many Buy Now, Pay Later lenders are shifting their business models toward proprietary app usage, which allows them to build a valuable digital profile of each user’s shopping preferences and behavior. The practice of harvesting and monetizing consumer data across the payments and lending ecosystems may threaten consumers’ privacy, security, and autonomy. It also may lead to a consolidation of market power in the hands of a few large tech platforms who own the largest volume of consumer data, and reduce long-term innovation, choice, and price competition.

• Debt accumulation and overextension: Buy Now, Pay Later is engineered to encourage consumers to purchase more and borrow more. As a result, borrowers can easily end up taking out several loans within a short time frame at multiple lenders or Buy Now, Pay Later debts may have effects on other debts. Because most Buy Now, Pay Later lenders do not currently furnish data to the major credit reporting companies, both Buy Now, Pay Later and other lenders are unaware of the borrower’s current liabilities when making a decision to originate new loans.

Buy Now, Pay Later providers are subject to some federal and state oversight. The CFPB has enforcement authority over providers of credit, and it has authority to supervise any non-depository covered persons, such as a Buy Now, Pay Later provider, in certain circumstances. Some states consider Buy Now, Pay Later to be consumer credit and require state licensing or registration, as well as compliance with state consumer credit laws, while other states do not require licensing or registration for Buy Now, Pay Later products with no interest or finance charges.

To address the discrete consumer harms, the CFPB will identify potential interpretive guidance or rules to issue with the goal of ensuring that Buy Now, Pay Later lenders adhere to many of the baseline protections that Congress has already established for credit cards. As part of this review, the agency will also ensure Buy Now, Pay Later lenders, just like credit card companies, are subjected to appropriate supervisory examinations.

To address emerging risk issues with data harvesting, the CFPB will identify the data surveillance practices that Buy Now, Pay Later lenders should seek to avoid.

To reduce the risk of borrower overextension, the CFPB will continue to address how the industry can develop appropriate and accurate credit reporting practices. The agency will also take steps to ensure the methodology used by the CFPB and the rest of the Federal Reserve System to estimate household debt burden is rigorous.

Today’s report comes after the Bureau announced a market monitoring inquiry in December 2021 to gain more insight into the industry. In January 2022, the CFPB submitted a public notice and request for comments from the public on their experiences dealing with Buy Now, Pay Later loans. The data and insights in the report are based on feedback from that request, along with deidentified submissions in the public CFPB complaint database and publicly available financial filings and other source material from the five firms who received the Bureau’s market monitoring orders.