Published: December 2023
Source: Office of the Comptroller of the Currency (OCC)
Why we picked it: No matter your personal feelings about buy now, pay later as a way to finance purchases, the growth of BNPL has been fascinating to watch. A growing number of banks are moving into some aspect of BNPL. Some chose the consumer banking side, chiefly via variations on their credit card offerings. Some entered via the merchant banking side, where institutions like Citizens Bank tailor programs to specific retailers’ needs. Others have multiple strategies.
At the same time, however, BNPL lenders and their competitors are still waiting for the Consumer Financial Protection Bureau to drop the other shoe, after it vacuumed up huge amounts of data two years ago. A call for public comment produced input from as far away as Australia (a negative viewpoint). Many have anticipated regulations would follow soon, but none have materialized yet.
What’s been missing so far from this mix has been a federal regulatory voice.
That changed nine days after Cyber Monday shattered previous BNPL spending levels — up 42.5% over 2022’s day — and a 20% year-over-year boom in Black Friday weekend online BNPL spending.
The Comptroller’s Office published “Retail Lending: Risk Management of ‘Buy Now, Pay Later’ Lending.” The new document doesn’t introduce any new rules or regulations. Instead, it summarizes in one place everything in federal banking law and policy that touches on BNPL. For a banking institution that has not already dug into the details, the bulletin is a helpful guide. It’s also a regulatory clearing of the throat. The latter harrumph is as if to say: “We’ve already got a lot of rules that cover this … and we’ll be watching.”
The bulletin specifically focuses on “pay-in-four” plans that carry 0% interest and no other finance charges. The document adds that longer-term plans, which have attracted both banks as well as nonbank players like Affirm, are already covered by federal rules concerning traditional installment loans.
Eyes on BNPL risk. The focus for much of the bulletin is risk management, especially compliance risk management. This is notable because much more attention has been paid to the credit risk issues posed by BNPL. When and if the CFPB publishes proposed regulation, it will be focused on consumer protection. In contrast, the OCC document makes clear that agency’s concerns cover the regulatory waterfront. Specifically mentioned is “UDAAP” — “unfair, deceptive and abusive acts and practices” — an expansion from earlier law that was introduced in 2010 by the Dodd-Frank Act, and still subject to argument over interpretation.
Quotable: “Bank management should give close attention to the delivery method, timing, and appropriateness of marketing, advertising, and consumer disclosures to ensure that they all clearly state the borrower’s obligations under the contract and clearly state any fees that may apply. The lack of clear, standardized disclosure language could obscure the true nature of the product as a loan.”
• A recurring theme in federal rules and recent commentary is managing the risks of third-party relationships. A liberal dose of this is mixed into the OCC document. Some banks serve nonbank BNPL providers with banking-as-a-service relationships, rather than going into buy now, pay later on their own. This does not provide insulation from risks, however.
• Individual BNPL providers say they have much of the credit risk of these plans down to a science, But the bulletin makes clear that much traditional consumer credit risk management doesn’t quite fit BNPL. This could change, but even now credit bureau reporting on BNPL hasn’t been smoothed out, even when it is happening. Beyond that, the consumer credit industry’s standard measures of delinquency — 30, 60 and 90 days past due — don’t work. The typical pay-in-four plan is done in six weeks, just42 days.
“Existing credit scoring systems are not designed to capture the very short-term nature of structure of BNPL loans,” the bulletin says.
• Fraud is something that doesn’t get as much discussion in BNPL coverage as it ought to.
An interesting point: “Given BNPL borrower demographics and prevalence of online purchases, banks should have processes to confirm that potential borrowers are of legal age to obtain credit.”
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What we liked: This is a pretty comprehensive job on the essential considerations that any bank must weigh before traveling too far down the BNPL road.
What we didn’t: Timing. Over the last year or so the Comptroller’s Office has established a pattern of commenting in speeches or issuing documents about trends that have already moved beyond the early days. (Another example: Banking-as-a-service.) To see where things are heading with BNPL doesn’t take any special prescience. Regular reading of the trade media alone should be plenty. What took so long?
Things that made us go “Hmm”: Studies and articles about payments often speak as if the various ways to pay exist in their own silos. BNPL, however, breaks the boundaries. The first installment of a pay-in-four plan generally gets paid with a debit card or a credit card. Is that a gain of one quarter of a purchase for the card issuer? Or is it a loss of three-quarters of the purchase? If the card sits in a digital wallet, is that a card transaction or a digital wallet transaction?
This interconnectedness is subtly underscored in several places in the bulletin, including where collateral risks are discussed. One example: When a BNPL buyer accidentally goes into overdraft when paying with a debit card.
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Looking at BNPL as a Compliance Challenge
Payments involve numerous compliance duties, and when you consider that BNPL is also a credit instrument, the range of compliance challenges grows.
One is the application of fair-lending laws to how BNPL programs are promoted. The 2023 FinHealth Spend Report from the Financial Health Network pointed out that “households of color” use BNPL the most: While 14% of all households have used a pay-in-four plan, 24% of Black households and 18% of Latinx households have done so, versus just 11% of white households.
Think About Implications for Evolving Practices
Finally, the bulletin makes some helpful points about how these short-term plans require a different approach to credit management and collections.
“Forecasting, analytics, and stress testing methods should consider BNPL loan structures, risk characteristics, and revenue steams,” the bulletin says. “Methods to collect BNPL debt, mitigate losses, and contact borrowers may warrant specialized approaches and strategies that differ from traditional consumer debt collection practices.”