BNPL Players Need to Pivot Now as Lenders’ Profit Margins Shrink

The Consumer Financial Protection Bureau (CFPB) published a report offering key insights on the Buy Now, Pay Later (BNPL) industry. The following are 10 notable points from the study.

1. The five firms surveyed in the report originated 180 million loans totaling over US$24 billion in 2021, a near tenfold increase from 2019.

2. 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.

GMV (i.e., dollar originations) by vertical and year across the five lenders surveyed, expressed as raw dollar amounts and as a share of the year’s total.

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

4. 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.

13.7 percent of loans involved a return or dispute in 2021, and on a dollar basis, 60.3 percent of these returns or disputes were refunded.

5. 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.

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

Unit margins aggregated across the five lenders surveyed for 2019, 2020, and 2021. All figures are expressed as a percent of that year’s GMV.

7. Inconsistent consumer protections: These include a lack of standardised cost-of-credit disclosures, minimal dispute resolution rights, a forced opt-in to autopay, and multiple late fees on the same missed payment.

8. Data harvesting and monetisation: Many BNPL 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 behaviour.

Share of unique BNPL borrowers by age cohort for 2019, 2020, and 2021.

9. Debt accumulation and overextension: Because most BNPL lenders do not currently furnish data to the major credit reporting companies, all lenders are unaware of the borrower’s current liabilities when making a decision to originate new loans.

10. Uneven regulation across states: Some states consider BNPL to be consumer credit and require state licensing or compliance with state consumer credit laws, while other states do not require licensing or registration for BNPL products with no interest or finance charges.

Commenting on the release of the report, CFPB Director Rohit Chopra said,

“I believe that Buy Now, Pay Later can grow and serve consumers well if we can collectively address some of these gaps.

If Buy Now, Pay Later lenders incorporate the protections and protocols that we observe in other financial products, this would go a long way to ensure that there is healthy competition where consumers have a baseline level of protections.”