Rapidly Growing “Buy Now, Pay Later” (BNPL) Financing: Market Developments and Policy Issues

INSIGHTi

Rapidly Growing “Buy Now, Pay Later”
(BNPL) Financing: Market Developments and
Policy Issues
Updated November 1, 2021
“Buy now, pay later” (BNPL) is a form of point-of-sales financing. With BNPL financing, a consumer can
purchase an item now and pay for it later on an agreed upon payment schedule. 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. The House
Financial Services committee is holding a hearing on this and other related topics on November 2, 2021.
“Buy Now, Pay Later” (BNPL) Financing Market
BNPL financing allows consumers to pay for purchases in payments over time, generally 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 payments over a shorter six-week
period.
BNPL financing aims to help consumers with their personal cash flow. Compared to other traditional
financial products, BNPL financing is often lower cost and more flexible. 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 financing services earn most of their revenue by
charging merchants, who are willing to pay to attract new consumers to their merchandise. While some
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BNPL companies operate independently, others work with banks. In these instances, a company may buy
the loans back from a bank or sell them to third parties.
Companies operating in the BNPL space include Klarna, Afterpay, Affirm, Splitit, and Sezzle. Despite
often operating at a loss, some of these companies have high market values. Valuations may reflect
expected value beyond the companies’ BNPL financing business, such as the value of consumer spending
data 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 flexibility to consumers, particularly those who
might not be able to access 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
common in more traditional financial products. For example, if merchandise is faulty or a
scam, a BNPL consumer may still be responsible for paying the merchandise cost in these
cases, unlike what may be the case with credit card dispute protections.
 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. However, consumers are likely to damage their credit scores if
they become delinquent on their BNPL payments, because debts in collection can be
reported to consumer credit bureaus. For example, one study finds that almost three-
quarters of consumers who have missed BNPL payments report credit score declines due
to their late payments.
 Consumer Data Privacy, Control, and Security: BNPL financing services often access
sensitive consumer data, such as consumer shopping behavior, which may introduce

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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.

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Author Information

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





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