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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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August 1, 2022

BNPL Sailing toward Stormy Waters

Editor's note: This is the first of a two-part series on BNPL.

Buy now, pay later (BNPL) services grew meteorically over the last year, particularly in the United States. A 2022 reportOff-site link from a payments firm makes several projections about BNPL adoption:

  • BNPL is projected to be the world's fastest-growing payment method both online and in the store through 2025.
  • It is projected to account for 1.6 percent, or $941 billion, of global POS channel transaction value by 2025.
  • Also by 2025, it is projected to account for approximately 5.3 percent, or $438 billion, of global e-commerce transaction value, increasing its share from 2.9 percent, or $157 billion, in 2021.

According to a digital research firm, BNPL sales in the United States will exceed $100 billionOff-site link by the end of 2024.

Despite this strong showing, the BNPL industry has suddenly found itself facing some stormy waters due to a number of challenges. For one, consumer adoption of emerging payments technology often outpaces consumer understanding of how the payment process works, either because the provider doesn't offer clear education or a disclosure or because the consumer doesn't pay attention to this information when it is offered. So when problems occur, the consumer demands the situation be corrected and, if that doesn't happen, likely makes a formal complaint.

Because this scenario has occurred with BNPL, consumer advocacy groups have increased their scrutiny of these firms and regulators have been reacting to the large number of complaints about the service and fees. Last December, the Consumer Financial Protection Bureau issued an order Adobe PDF file formatOff-site link to the five major BNPL firms to respond to a multi-page request for information about their business model, asking them to describe volume, payment methods, underwriting, financial information, and credit agency reporting. In January 2022, the CFPB also asked for public commentOff-site link on the BNPL market. Responses by the BNPL firms were required by March 1, 2022, but I've heard that several of the recipients challenged the CFPB's authority to request some or all the information, citing its confidential nature. The CFPB has not publicly published an updated status of the request.

The popularity of BNPL has increased competition, with additional fintech firms and financial institutions entering the field. However, investor outlook appears to have softened, as evidenced by falling stock prices and reductions in staffing levels in several firms, as well as revised revenue forecasts. Rising interest rates are likely to create financial pressure on the BNPL firms as their costs for carrying the short-term, no-interest loans grow. While some of the BNPL firms are self-financing, others are partnering with financial services firms or investors who are increasing their fees. Meanwhile, the current inflation rate is affecting consumers' discretionary spending. All of this together means that some consumers may be likelier to assume debt beyond their ability to repay.

Consumer advocacy groups have warned that BNPL offerings raise the specter of added debt, especially for consumers who open accounts with multiple BNPL providers. Since the transactions are generally not reported to the credit agencies, one BNPL provider doesn't have true insight into the other BNPL relationships a customer may have. While the credit agencies are working on the ability to receive and report on short-term BNPL transactions, this work is still in progress, with each credit agency developing its own process.

In next week's post, my colleague Claire Greene will look at BNPL from a merchant's view. The RPRF team will continue to monitor the developments in the BNPL market and provide commentary.