Fed Report Finds BNPL Loans Increase Financial Inclusion

The Federal Reserve Bank of New York recently found that buy now/pay later (BNPL) loans have helped consumers pay off debt at a lower cost than traditional loans, despite consumer advocates urging regulators to rein in the industry. Many financially vulnerable consumers are likely to use BNPL loans from fintechs such as Affirm, Afterpay, and Klarna, but the products are used by a wide range of Americans.

“More data and analysis are needed to investigate the extent to which BNPL borrowing may contribute to greater financial stress and affect overall financial well-being, especially over the course of the business cycle,” wrote the Fed researchers. According to American Banker, they used survey data collected in June 2023 from a panel of 1,000 U.S. consumers.

The BNPL industry gained a lot of popularity during the pandemic and has remained mostly unregulated, so the Consumer Financial Protection Bureau (CFPB) opened a market inquiry into the industry in 2021. Last year, the CFPB released a report highlighting its concerns about the industry, though the Fed claimed that it’s hard to pinpoint the extent of harm from BNPL lenders.

Observers anticipate that the CFPB will start requiring fintechs to report customer activity to credit bureaus in an attempt to protect consumers. When Apple introduced its Apple Pay Later installment loans earlier this year, it promised to report borrowing activity to credit reporting bureaus, and Affirm recently announced a partnership with FICO.

Survey data indicated that BNPL loan use is higher among renters, females, those with no college degree, and those with decreasing income. 64 percent of respondents have been offered a BNPL loan, 60 percent of respondents with credit scores higher than 760 have been offered one, and 80 percent of respondents with credit scores under 620 have received a BNPL offer.

Though lower-income consumers are less likely to be offered a BNPL loan, the Fed researchers found that lower-income consumers who have been offered one are more likely to use one. “The fact that a disproportionate share of BNPL users are already financially fragile raises questions about the resilience of BNPL lending and its performance following an adverse economic shock,” they concluded.