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A recent report reveals that buy now, pay later consumers already have high levels of indebtedness, overdraft rates, and reliance on alternative credit products such as payday loans.
On Thursday, the Consumer Financial Protection Bureau (CFPB) issued its latest report on buy now, pay later (BNPL) companies, based upon the agency’s yearly Making Ends Meet survey. A late-December summary of the Making Ends Meet survey found that the average financial well-being of Americans has dropped to 2019 levels. Most affected were low-income individuals, renters, and Hispanic and Black households. According to the 2022 report, if half of Black and Hispanic households lost their main source of income, they could not cover their expenses for more than a month.
But the report’s significance is that it focuses specifically on the financial profiles of BNPL borrowers, and builds upon the CFPB’s sustained inquiry into the industry’s practices. When the Prospect first reported on the CFPB investigating BNPL companies, they were touting themselves as financial liberators for the young, tech-savvy consumer, preying on fears about the accumulation of debt.
By September, the CFPB’s first report on the business practices of the largest BNPL companies revealed that the industry’s practices were worse than initially expected. In fact, the use of BNPL increased the chances of consumers’ finances becoming overextended, meaning they had several loans on overlapping deadlines. CFPB also found that companies were collecting reams of data that could potentially turn into sophisticated marketing practices. That translates in the long run to a personalized product discovery engine, thus increasing the amount of credit borrowed in the first place.
Put simply, the September report showed how BNPL companies, aside from overextending consumers, were running hyper-surveillance operations ripe for exploitation.
Building upon a year’s worth of research, the latest report reveals that BNPL consumers already have high levels of indebtedness, overdraft rates, and reliance on alternative credit products such as payday loans. The profile of the typical BNPL customer is also coming into focus. It’s someone who makes more than $20,000 a year but no more than $50,000, and they’re more likely to be a combination of Black, Hispanic, female, and a renter. This is not exactly the prototype that BNPL firms sold to investors; it’s more like the profile of a desperate consumer persuaded into using yet another financial scheme.
The report warns that there are three limitations with the data reviewed: BNPLs can also offer traditional installment payments, the report omits consumers without credit records, and the CFPB says that “the data in this report do not allow us to distinguish the direction of causality.” Despite those limitations, it does offer the ability to see the evolution of the BNPL industry, alongside its documented suspicious data-harvesting practices.
The report suggests that BNPL financing is probably attractive to the people using it because it gives the illusion that they can buy something they otherwise wouldn’t be able to afford. The sections on BNPL users’ credit profiles, savings, and existing debt show that the finances of a BNPL borrower don’t improve. For example, they’re more in debt than a non-BNPL user, more likely to be delinquent on a different credit line, and have less in savings.
BNPL users also experience a “revolving” effect on their finances, meaning that they are accumulating interest by not paying off their debt balances. The report states, “69 percent of all BNPL users and 42 percent of non-BNPL users were revolving on at least one credit card.” Additionally, BNPL users are 26 percent more likely to have previously overdrafted, and 12 percent more likely to have used payday or pawn loans, compared to non-BNPL users. Those statistics combined with what would lead to more expensive credit options (which are already accumulating interest) create a profile of someone in severe financial precarity.
The CFPB won’t go so far as to say BNPLs create this financial precarity. Either way, that question seems more like a chicken-or-the-egg dilemma.
But the report comes as the leading BNPL companies have struggled in a tougher global economy, due to higher interest rates and increased scrutiny from regulators like the CFPB. Now, BNPL companies such as Klarna are readjusting to reach profitability as quickly as possible, instead of prioritizing the customer base growth that put the industry on the radar of regulators in the U.S. and U.K. in the first place. What exactly those business strategies will look like is to be seen.
But more importantly, the overdue scrutiny of the BNPL industry has yet to fade. As the CFPB report states, “these results paint a consistent picture of BNPL borrowers exhibiting high levels of financial distress … An important question for future research is whether BNPL improves the financial health of consumers in distress or exacerbates these differences.”
