OCC Issues BNPL Guidance

Last week, the Office of the Comptroller of the Currency (OCC) issued guidance to national banks and federal savings associations addressing what it says are the risks of “buy now, pay later” (BNPL) lending. BNPL products present compliance, credit, and reputation challenges for banks, so the regulator urged financial institutions to make sure that marketing materials are clearly and easily understood.

“Supporting a fair and inclusive financial system is a priority for the OCC and is critical to maintaining trust in the banking system,” said Michael Hsu, Acting Comptroller of the Currency. “As the buy-now-pay-later market grows and we enter the holiday season, the guidance confirms our expectation that OCC-supervised institutions offering these products do so in a responsible manner.”

According to Bloomberg, traditional lenders have joined companies like Affirm Holdings Inc., Afterpay Ltd., and Klarna Bank AB to give customers borrowing options with shorter terms. BNPL offerings helped  spark a record start to the holiday shopping season in the U.S., even though other agencies like the Consumer Financial Protection Bureau (CFPB) have joined the OCC in warning against them.

The OCC warned banks that consumers may not fully understand repayment terms with BNPL, and those with no credit histories may apply for BNPL loans, making underwriting more difficult. There may also be difficulties for customers returning items or disputing purchases. 

Additionally, the regulator cautioned that third-party relationships could expose banks to compliance or operational risks beyond their control. Credit reporting agencies also have a limited scope of BNPL activity and how it could impact consumers’ credit scores. 

Hsu noted that consumers can get overextended if they aren’t careful, which can lead to loan delinquencies. Even if loans don’t have finance charges, they can generate overdraft or late fees when linked to credit or debit cards. “That’s where the risks are,” he said.