The Buy Now Pay Later (BNPL) market is booming at an astonishing rate. This rapid expansion raises serious questions about its effect on consumers and the broader financial system. Heading into 2024, BNPL services have exploded into an extraordinary 91.5 million users in the United States. According to industry experts, in that same year, BNPL done through platforms such as PayPal skyrocketed to $33 billion, with an astounding annual growth rate of 20%! While the convenience of these services attracts many borrowers, nearly two-thirds of BNPL users report lower credit scores, raising questions about their financial health.
In May, New York led the way with a groundbreaking plan to require BNPL companies to be licensed. This action is a major regulatory step into an otherwise unregulated market. We have very little oversight, which makes it incredibly difficult to keep tabs on borrowers’ debt. Lenders may not be aware when borrowers are simultaneously borrowing through multiple BNPL platforms. This contrary and seemingly growing federal trend is very frightening. An additional 4.3 million BNPL borrowers are in late-stage delinquency and 5.3 million BNPL borrowers are in default. These figures are the size of the U.S. credit card market multiplied four times over.
The State of Borrowers and Regulatory Challenges
The quick adoption of BNPL services has lured a customer base that tends to be more financially vulnerable. Indeed, like we noted earlier, almost 2 in 3 BNPL borrowers have subprime credit scores. Data reveals that subprime or deep subprime applicants are approved for loans 78% of the time, suggesting that these services are increasingly accessible to individuals who may struggle to manage their finances effectively.
Nigel Morris, co-founder of Capital One, is a consumer lending savant. In doing so, he raised alarms about how these alarming trends could hurt American borrowers.
“If this idea was presented to your mother and she called you up and said, ‘Son, should I take this product?’ And if you can’t unequivocally say, ‘Yes, it’s a good product,’ you should not be offering it to the American people.” – Nigel Morris
The Consumer Financial Protection Bureau (CFPB) recently tried to impose regulations on BNPL transactions by treating them like credit card purchases. But soon after the rule went into effect, the agency announced that it would not prioritize enforcement of this rule. This lack of regulation allows BNPL companies to operate with minimal oversight. This putt-putting around raises serious doubts about their good faith and the effects on consumers for years to come.
Unlike credit card debt or auto loans, BNPL loans tend to be lower in amount. They tend to have significantly greater rates of delinquency. This dangerous new trend endangers the entire economic landscape, not just borrowers themselves. This increase in defaults and delinquencies is an early warning sign of storm clouds on the horizon for lenders and consumers alike.
“I think that the role of the moral compass in consumer lending is very, very important.” – Nigel Morris
Financial Implications and Market Dynamics
Specialists admit that even though delinquency rates have not made major jumps yet, the economy still continues to be a very risky place. Morris remarked on the existing stability:
BNPL services are quickly outpacing protections that should apply to them. Businesses are looking to embed payments and lending into their main services. No clear answers to sustainability and profitability in a fast-changing marketplace. While concerning, it’s the future of profitability that really isn’t clear. Morris pointed out:
“If you take a half step back and we look at the U.S. consumer at the moment… so far, so good. Delinquency is not rising yet. Charge-offs are not rising yet. But there’s clearly storm clouds on the horizon.” – Nigel Morris
The future trajectory of BNPL services is still to be determined as they continue to face regulatory spotlight and evolving consumer behaviors. KKR’s agreement to purchase up to $44 billion in BNPL debt from PayPal in 2023 exemplifies the growing interest from investors in this sector. It’s why companies like Affirm were able to issue $11.4 billion in asset-backed securities as of June. This fast-closing market is gaining national attention.
“When I talk to some of these software companies that are now embedding payments, lending and insurance… they say, ‘You know what, I think I’m going to make more money in embedded finance than I am in my core software.’” – Nigel Morris
The Future of BNPL Services
That said, we cannot discount the inherent risks associated with having such a high delinquency rate. Morris highlighted the troubling reality that many consumers find themselves in financially precarious situations due to reliance on these services:
As BNPL services solidify their place in the financial landscape, stakeholders must consider how best to protect consumers while ensuring market stability. The possible long-term impact on borrowers and lenders both are deserving of close attention as this industry continues to grow.
“I think is a pretty clear indication that a lot of people are struggling.” – Nigel Morris
As BNPL services solidify their place in the financial landscape, stakeholders must consider how best to protect consumers while ensuring market stability. The potential long-term implications for borrowers and lenders alike warrant careful examination as this sector continues to evolve.