By Charles Abraham, U.S. Financial Services Practice Leader, Mazars
The “Buy Now, Pay Later” (BNPL) market, an alternative to the mature credit-card market, has experienced significant growth over the past few years. The growth is primarily due to the ease and speed of the underwriting process, zero interest, the ease of repayment and the short-term nature of the loans. As it focuses on retail customers, its ability to reduce the friction of obtaining credit has been a tremendous factor in its growth.
Key characteristics of BNPL arrangements generally include:
- The customers are retail consumers.
- The amount of credit provided is generally small (usually less than $1,000).
- The duration of the credit is short (usually less than two months).
- The payment terms usually consist of a downpayment upfront and equal installments for the duration.
- The credit is interest-free, although some lenders charge late fees and other administrative charges.
BNPL products have grown significantly in the market since 2019. The US Consumer Financial Protection Bureau (CFPB) issued a report in September 2022 that noted: “[f]rom 2019 to 2021, the number of BNPL loans originated in the U.S. by the five lenders surveyed grew by 970%, from 16.8 to 180 million, while the dollar volume of those originations (commonly referred to as Gross Merchandise Volume, or GMV) grew by 1,092%, from $2 billion to $24.2 billion.”
In the United States, inflation peaked in June 2022 at more than 9 percent. The first-quarter 2023 “Quarterly Report on Household Debt and Credit” issued by the Federal Reserve Bank of New York (New York Fed) showed continued use of credit-card debt and increased mortgage balances and home-equity lines of credit. Credit-card balances increased to $986 billion at the end of 2022; however, they stayed flat in the first quarter of 2023, “bucking the typical trend of balance declines in first quarters”. Generally, this indicates continued consumer stress due to inflation and other factors.
While inflation has decreased in 2023, interest rates are elevated (with no indication of decreases in the short term). We anticipate that BNPL usage will continue to increase in 2023. According to the CFPB, “[w]hile many BNPL borrowers whom we observed used the product without any noticeable indications of financial stress, BNPL borrowers were, on average, much more likely to be highly indebted, revolve on their credit cards, have delinquencies in traditional credit products and use high-interest financial services such as payday, pawn, and overdraft compared to non-BNPL borrowers. They are more likely to have traditional credit products like credit and retail cards, personal loans, and student loans, but have lower liquidity and savings than non-BNPL borrowers.”
In March 2023, Apple also joined the BNPL market, and their product, Apple Pay Later, allows consumers to split their purchases into four equal payments paid over six weeks with no interest or fees. Currently, purchases can be between $50 and $1,000. Based on how ubiquitous Apple products are, it can be expected that, at least in the short term, the BNPL market will continue to grow. As Apple Pay Later primarily focuses on current Apple consumers, it will be one more low-friction method to increase customer access to BNPL loans and further ingrain them into the Apple ecosystem. This new product utilizes the Mastercard Installments program, which also reduces friction as eligible merchants don’t need to take additional steps to implement Apple Pay Later separately.
Apple continues to find ways to provide value to those within its ecosystem, and the Apple Pay Later product is focused on iPhone digital-wallet users. Apple notifies users that Apple Pay Later is available in their digital wallets alongside Apple’s suite of financial-services products, which now includes a high-yield savings account. These tools will guide the development of Apple Pay Later by providing visibility into individual consumers’ financial-services activities and needs.
The continued growth in the sector accompanied by visibility into consumer finances and the additional cybersecurity risks involved with BNPL programs will likely lead to more regulations for this lightly regulated product. The increasing attention that the CFPB is paying to this market indicates the regulatory interest in evaluating risks to consumers and the need for protections and disclosures to be put in place.
The challenge for BNPL providers is to continue offering frictionless experiences while potentially providing more disclosures and protections to consumers. The key benefit of BNPL products (easy access to credit, which attracts incremental consumer spending) might cause concern for regulators as it also leads to stress on borrowers, who might overuse the BNPL products, putting their ability to repay their BNPL and non-BNPL loans at risk.
Additional questions about BNPL products include:
- How is consumer data protected? As most BNPL products can access customer debit-card data, how does the BNPL provider manage those cybersecurity risks?
- How is the BNPL provider utilizing its unique visibility into consumer-spending patterns? Are their systems using this visibility to entice additional consumer spending (similar to social-media company algorithms designed to increase screen time on apps)?
- How might such algorithms affect consumer privacy? How are consumer-spending patterns shared with merchants that use the BNPL product?
- What should standard disclosures on risks, privacy and conflicts of interest be?
In addition, as the market continues to grow, BNPL providers must balance maintaining underwriting quality with minimizing losses. In the current market, the BNPL model is expected to come under pressure from declining merchant discount fees, increased credit risks and higher funding costs.
So, where do we see the BNPL market going from here? Continued evolution and maturity. We expect the market to continue to grow, but additional regulatory focus and new rules will be implemented. In addition, BNPL providers are spending additional time dealing with the new risks in the market (consumers under more financial stress, the higher interest-rate environment and so on). One thing is for sure: It will not be business as usual.