New BNPL rules in the US: financial resilience is key

The BNPL market in the US has expanded rapidly over the past few years with total sales via BNPL platforms expected to reach $80.7 billion in 2024 – up 212% from 2021 levels ($37.8 billion). As BNPL debt isn't required to be reported to credit bureaus, it's often used by consumers with little credit or subprime credit scores who are unable to obtain credit elsewhere; this has contributed to its quick growth.

The concern is that BNPL can lead consumers to overextend themselves or take on more debt than they can afford. The Consumer Financial Protection Bureau (CFPB) has expressed concern about ‘loan stacking’ – when individuals take out several BNPL loans at once with different providers – and that the sector is "sidestepping the long-standing rights and responsibilities" towards consumers. For example, following its inquiry into the market more than two years ago, the CFPB found that more than 13% of BNPL transactions involved a return or dispute. In 2021, people disputed or returned $1.8 billion in transactions at the five companies surveyed.

What do the new rules involve and what will the impact be for BNPL firms? 

BNPL lenders must comply with credit card standards

In May 2024, the CFPB issued a new interpretive rule which requires BNPL lenders to treat consumers as credit card providers do under the Truth in Lending Act.

BNPL lenders must now:

• investigate disputes – lenders must pause payment requirements during the investigation and, where relevant, must issue credits
• refund returned products or cancelled services – lenders must credit the refunds to the consumers’ accounts
• provide billing statements of money owed, similar to ones received for classic credit card accounts.

Impact of regulation for BNPL firms

While many BNPL providers have argued that the BNPL product is different from credit cards, in general the industry has said that it welcomes regulation and that consistent standards across the industry will be beneficial. However, the impact of regulation and cost of compliance, combined with other market challenges in the sector, may also create stress for some firms.

Management will need to consider the time and expense required to implement the systems and processes required to comply with the CFPB’s requirements. As well as the training and resource required around dealing with customer compliance, lenders must consider what impact the pausing of payment requirements during investigation may have on cashflow and liquidity.

BNPL lenders will need to include all these strands of costs and delayed repayments in their forecasts to provide realistic financial foresight that can identify potential pinch points in the business.

Increased risk of consumer delinquency

At the same time as implementing the CFPB’s new requirements, BNPL lenders may be experiencing a rise in default rates.

While consumer spending has proved remarkably resilient in the US, there are signs of financial pressure as consumers continue to be affected by the high inflation rates seen in 2022/23. Delinquency rates on credit cards – the most prevalent source of consumer credit with 70% of the market – have reached the highest since at least 2012, with the share of debts 30, 60 and 90 days late all increasing. A report on household debt and credit by the Federal Reserve Bank of New York shows that credit card delinquency rates have risen to 8.5% of balances in the past two years.

A Bloomberg-Harris Poll, published in May 2024, revealed that 43% of BNPL users who owed money said they were behind on payments, while 28% said they were delinquent on other debt because of spending on BNPL platforms. In another sign of consumer stress, almost half (48%) of those using BNPL said they’ve started using it to pay bills or buy essential items, including gas and groceries. Approximately 42% of those with household income of more than $100,000 also report being behind or delinquent on BNPL payments, showing that Americans are struggling across the board.

Rising default rates and corresponding pressure on profitability can be a particularly pertinent issue for BNPL lenders given the high-volume, low-margin nature of the sector. Careful consideration should be given to tightening underwriting criteria – which many lenders have already done over the past couple of years. BNPL providers have a tricky path to navigate: originating enough loans to support sales and meet the expectations of retail partners, while ensuring that credit losses are limited.

BNPL business models tested by competition

The market share of existing providers is being challenged as traditional credit card issuers enter the market. American Express, Citigroup and US Bank all now provide BNPL products, benefiting from existing credit card networks and internal underwriting processes. Global tech firms have also entered the market. 

This increased competition is likely to put a downward pressure on margins.

Access to capital more challenging

Many BNPL lenders rely on short-term borrowing to facilitate their core business and have little access to cheaper consumer deposits. The steady increase in interest rates by the Federal Reserve has therefore had considerable impact on their cost of funds.

BNPL firms may also be experiencing softening investor interest. While Klarna, one of the largest global BNPL firms, has recently reported its first quarterly profit in four years, many BNPL firms are loss-making. In a recent sector report by Moody’s, the ratings agency questions how long investors will continue to back the sector after several years of losses, especially as the cost of funding is higher.

Moody’s suggests that BNPL firms now need to focus on profit rather than increasing market share: “If losses are not contained, and new equity injections are not secured, then many BNPL will deplete their equity over the next few years.” This strategy aligns with David Sykes, Chief Commercial Officer for Klarna, who has stated: “It’s very clear that the markets are looking for something different now. It’s not about future growth; it’s about profitability today.”

What can BNPL lenders do now?

Firms should seek support on the new regulatory requirements to ensure compliance, including advice on appropriate governance structures.

BNPL lenders should also consider their financial and operational resilience. Firms need to have appropriate forecasting models in place, which can be used to stress-test resilience in different scenarios to provide clarity on triggers that may lead to underperformance. Firms should also ensure they have re-considered impairment and provisioning across their portfolios, their cost of sales versus profitability, and where they see corridors of market growth.

For more insight and guidance, get in touch with Chris Laverty.

Camilla Fawkner