Unpacking the CFPB report on BNPL, in 4 charts

Late last year, the CFPB issued orders to five non-bank BNPL lenders, asking for detailed information on the activities and risks inherent to their lending practices. "We have ordered Affirm, Afterpay, Klarna, PayPal, and Zip to submit information so that we can report to the public about industry practices and risks," said CFPB director Rohit Chopra.

Almost a year later, the CFPB has published a detailed report on its findings – and there is much that warrants unpacking.

1. Many people are using BNPL repeatedly

As expected, BNPL is giving credit cards a run for their money. However, what is perhaps surprising is the frequency of repeated usage – BNPL is proving to be sticky. The report shows a steady uptick in consumers using BNPL more than 5 or 10 times in each quarter from 2019 to 2021. Repeat usage not only signals a preference on the part of consumers, but also indicates the efficacy with which the surveyed BNPL lenders have been able to retain their customers. As the chart above shows, the frequency of repeat usage is even more noticeable with consumers who have used BNPL 10 or more times.

While the above chart only shows the increase in repeat usage on the upper ends of the spectrum, average repeat use has also been on a steady rise – with figures rising from 1.9 in the first quarter of 2019 to 2.8 in Q4 of 2021.

2. What is being bought?

The table above shows that although apparel made up a very high percentage of overall BNPL purchases in 2019, the distribution of the merchant vertical has been changing over time. Between 2019 and 2021, the apparel category lost 15.6% of its total share in loan originations. Meanwhile, previously underperforming verticals such as 'travel/entertainment', 'services', 'automotive', 'health' and 'everyday', saw a combined increase of 3.9% in 2021 and 1.5% in 2020.

Despite growing popularity, some sub-verticals like education – which is part of the 'services' vertical – may be growing at the cost of the financial health of their target market. Consumer advocates state that the use of BNPL in education could not only cause a rise in student debt, but is also leading to more students financing their education at unaccredited and unregulated institutions.

3. Who is borrowing?

A significant portion of the early users of BNPL were young, and this stayed true in 2021 as well. However, many consumers aged 34-40 and 51-64 also seem to be moving towards BNPL. Despite this movement, nearly half of the borrower base remains under 33 years old, showing BNPL's sustained popularity among younger borrowers. This, combined with the previous discussion on BNPL use in education, may pose serious questions about the risks of BNPL for young consumers, like students who are at the beginning of their career.

While the risks to students are for now unclear, BNPL lenders’ efforts to attract older customers are becoming increasingly apparent. While credit cards continue to be a favorite amongst older consumers, the steady uptick in the share of this consumer group between 2019 and 2021 signals an effort on the part of BNPL lenders to attract consumer groups that have previously remained wary of this novel lending method.

4. Paying in 4, but with what?

Turns out BNPL borrowers continue to maintain a distance from credit cards when it comes to making payments. As the chart below shows, between 2019 and 2021, debit cards remained the uncontested mode of payment for BNPL borrowers, with credit cards steadily losing favor over the same period. This may be a result of the aversion to credit observed in BNPL borrowers, who perceive paying in four as a method of avoiding incurring debt that can pose issues with late fees and harm their credit scores. 

It bears mentioning here that making BNPL payments through credit cards can set off a toxic cycle of paying credit with credit. This issue is increasingly coming under scrutiny by consumer advocates, who point out that making BNPL payments with credit cards takes away from the premise and promise of BNPL. The biggest risks highlighted by the report in these cases concern mainly issues of “hidden interest” and overextension.

To ensure stickiness, BNPL lenders often employ 'autopay', which means that the lending app can automatically initiate payments on behalf of customers come due date. Due to its wide scope, the CFPB report dissects the autopay feature much more thoroughly than critiques have been able to do in the past, stating:

“BNPL lenders have different operational policies concerning payment method removal (i.e., removing autopay without adding a new payment method). One lender allows borrowers to do so on its self-service online portal. A second lender allows borrowers to do so by contacting customer service electronically or by phone, and a third allows it via phone-based customer service only. Two other lenders generally prohibit the practice, meaning that borrowers cannot turn autopay "off"."

Not being able to turn autopay off at all, or having to jump through hoops to do so, can hurt the consumer in a couple of ways. For one, it allows BNPL lenders to access more payments than they would otherwise, while simultaneously marketing their products for "how easy it is to pay back." Secondly, on a more sinister note, autopaying algorithms can often request borrower accounts for payments multiple times in cases of failure. This not only takes away from the consumer’s agency, but could lead to overdrafts for consumers who may already be struggling with making multiple payments. Despite these concerns, autopay is the de facto mode of payment for most BNPL lenders, raising many questions around BNPL’s effect on consumer financial well-being. On this issue, the CFPB states:

“Federal law on credit products is mindful that consumers should have choice when they decide if and how to make payments on outstanding debts. For example, the Electronic Funds Transfer Act, as implemented by Regulation E, prohibits a creditor from requiring a consumer to repay a loan through an automatic withdrawal from their deposit account, also known as autopay.”

When consumers fail to make payments, BNPL lenders' use of representment can go up to 8 times. The report points out that this practice may adversely affect consumers by incurring fees charged by the consumer’s bank on the associated payment method. This, combined with overdrafts, can exacerbate problems for consumers whose payment information is inextricably on file with their BNPL lenders. 

More lending, more data

While the report lists multiple harms that can arise from BNPL use such as loan stacking and revolving debt, most interesting perhaps is the CFPB’s attention to data harvesting. According to the agency, digital lending can harvest data at the intersections of digital commerce, content, and lending. BNPL lenders collect data for the purpose of deploying models that maximize the value of their methods and products. These methods can combine effective marketing and knowledge of sensitive consumer information to “engender repeat usage”, creating a very slippery slope for those who are balancing multiple loans or payments.

In June, while reporting on Afterpay’s integration with Cash App, I spoke to Hannah Gdalman of the Financial Health Network about similar research done by their organization surrounding the implications of BNPL on financial health. Some of her comments bear repeating in light of the information we just unpacked:

“If we think about a consumer with income volatility, what happens if multiple BNPL payments fall on a payday that is a bit lower than expected? This could lead to late payment fees, overdraft charges with their bank, or undue financial stress.”

Yes, it could, and what may be worse is that once your associated payment method is on file, it might be next to impossible to make the BNPL lender stop initiating payments from an account whose holder is already struggling with making requisite payments, let alone paying additional bank transaction processing fees.