INSIGHTi

Rapidly Growing “Buy Now, Pay Later”
(BNPL) Financing: Market Developments and
Policy Issues
October 26, 2021
“Buy now, pay later” (BNPL) is a form of point-of-sales financing. It allows a consumer to purchase and
take possession of an item immediately, then pay for it over a certain period of time or with a specified
number of payments. BNPL financing is often offered online and has generally been developed by
technology-focused, nonbank financial companies, often characterized as “fintech” companies.
BNPL financing has been growing rapidly in recent years. Reports suggest that BNPL financing may have
tripled in 2020 compared to the prior year. A consulting firm estimates that BNPL balances grew by 24%
from 2016 to 2019 and are expected to grow around 20% annually for the next three years.
This Insight discusses the BNPL financing market and potential policy issues in this market.
“Buy Now, Pay Later” (BNPL) Financing Market
BNPL financing allows consumers to spread the cost of a purchase over a set number of payments or
period of time without accruing interest. For example, some BNPL financing services may require four
installment payments (“Pay in 4”) in two-week intervals; other services may have regular intervals over a
six-week period.
BNPL financing aims to help consumers manage their personal cash flow, often at a lower cost and with
greater flexibility relative to traditional financial products. BNPL financing may be attractive to thin
credit file and younger consumers who may not qualify for traditional credit cards. Consumers may use
BNPL financing through a merchant that embeds it as a payment option in the checkout process or
directly on BNPL companies’ platforms. BNPL companies determine consumer terms through a soft
credit check and a consumer’s past performance on the platform.
While BNPL companies generally do not charge interest or fees at time of purchase, they charge a late fee
if a customer does not make payment on time. BNPL companies generate most of their revenue by
charging merchants for the service, who are willing to pay to attract new consumers to their merchandise.
While some companies that offer BNPL financing operate independently, others work with banks to
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originate a majority of their loans. In such instances, a company may buy the loans back or sell them to
third parties.
Companies operating in the BNPL space include Klarna, Afterpay, Affirm, Splitit, and Sezzle. Some of
these companies have high market values, despite often operating at a loss. Such valuations may reflect
expected value from sources other than the companies’ BNPL financing business, such as access to
consumer data and spending patterns and the ability to cross-sell traditional banking services.
Policy Issues
Generally, many BNPL financing services are provided by nonbank financial companies rather than
traditional banks. While these companies are not regulated as banks for safety and soundness, they
generally must comply with federal consumer protection and data security laws. At the federal level, the
Consumer Financial Protection Bureau (CFPB) has the authority in nonbank consumer financial markets
to write regulations, enforce laws, and supervise companies in certain cases.
While BNPL financing can provide access to credit or cash-flow flexibility to consumers who might not
be able to obtain traditional bank credit at better terms, this financing may also introduce consumer
protection risks to consumers that the CFPB is currently monitoring. This trade-off may be particularly
acute for younger or subprime consumers. Policy issues relating to BNPL financing include:
 Unsustainable Debt Risks: Although many BNPL financing services have no initial
interest or fees, some consumers may still face negative consequences due to the use of
these financing services, such as accruing charges when repayment is late. For example,
some studies suggest a high number of consumers miss BNPL payments; one study found
that 38% of consumers have missed BNPL payments. For consumers who have unpaid
BNPL payments, they could be blocked from future purchases or have their debts sent to
debt collectors.
 Consumer Disclosure Risks: BNPL financing may not be subject to similar disclosure
requirements as other consumer credit markets. The Truth in Lending Act (TILA; 15
U.S.C. §§1601 et seq.) requires disclosure of credit terms in many consumer credit
markets; however, TILA disclosure requirements apply only to consumer credit that is
subject to a finance charge or payable in more than four installments. Therefore, these
requirements may not apply to many BNPL financing services. There is a risk that
consumers may not understand the terms of BNPL financing, such as late payment fees,
before they use them. In addition, BNPL financing might not have consumer protections
similar to more traditional financial products. For example, BNPL financing generally
does not offer the same dispute protections as credit cards if merchandise is faulty or a
scam, and a BNPL consumer may still be responsible for paying the merchandise cost in
these cases.
 Consumer Credit Reporting: Many BNPL financing services do not report information
regularly to consumer credit bureaus. While some consumers may prefer to exclude
BNPL financing from their credit reports, others might miss out on the opportunity to
build a credit history, particularly those who pay their BNPL financing on time and have
limited credit histories. By contrast, consumers who become delinquent using BNPL
financing are likely to damage their credit scores because debts in collection can be
reported to consumer credit bureaus. For example, one study suggests that almost three-
quarters of consumers who have missed BNPL payments have seen their credit scores
drop due to the missed payments.

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
 Consumer Data Privacy, Control, and Security: BNPL financing services often access
sensitive consumer data, such as consumer shopping behavior, which may introduce
privacy and cybersecurity concerns. This information is valuable to companies that want
to understand consumer behavior and market new products and services. Consumers may
not understand how their data is being used by a company and may have a limited ability
to control or correct it, which can make it difficult to protect their privacy, obtain redress
for data breaches, or avoid other negative consequences from a company’s use of their
data.



Author Information

Cheryl R. Cooper
Paul Tierno
Analyst in Financial Economics
Analyst in Financial Economics





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