By Roy Urrico
Finopotamus aims to highlight white papers, surveys and reports that provide a glimpse as to what is taking place and/or impacting credit unions and other organizations in the financial services industry.
Consumers’ usage of buy now, pay later (BNPL) programs hit an all-time high for the 2023 holiday shopping season and is likely heading for new record usage in 2024 as the acceptance of BNPL installment payment plans continues to increase rapidly with consumers.
Despite the increasing use of BNPL installment payment plans by consumers, many credit unions have been waiting for guidance from regulators before they adopt such a program, Jennifer Bennett, strategic product manager, at Velera, noted in a blog titled New CFPB Ruling Gives Credit Unions Offering Post-Purchase BNPL Plans a Competitive Edge.
That guidance arrived on May 22, 2024, when the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule stating that lenders who offer BNPL meet the criteria for being credit card issuers under the Truth in Lending Act (TIL) and must follow the same regulations.
Benefits of BNPL
BNPL installment plans are here to stay, claims Bennett, and can provide many benefits for credit union members — when used responsibly. Many consumers view BNPL solutions as a way to have more flexibility and control over their finances with the uncertain economy.
“Installment plan offerings come in two different varieties — at-purchase and post-purchase plans. The most common offering — at-purchase, point-of-sale (POS) plans — requires consumers to pay by enrolling in installments during the checkout process of a purchase,” said Bennett.
Post-purchase options necessitate processor integration, but permit consumers to change a recent credit card transaction into installments. “Post-purchase plans are recommended because they provide card issuers greater flexibility based on cardholder history, existing credit lines and regular interactions,” she noted.
The installment plan options that most consumers are acquainted with are point-of-sale (POS) plans from the big BNPL merchants like Affirm, Klarna, Sezzle and AfterPay. “Point-of-sale BNPL is even moving into the physical merchant space, with retailers like Walmart offering Affirm’s BNPL option at their self-checkout kiosks,” explained Bennett.
Growing Acceptance
Consumer usage of BNPL programs was up 14% year over year, according to Adobe Analytics for the 2023 holiday shopping season. Consumers made $940 million in purchases using BNPL apps on Cyber Monday alone, an increase of 42.5% year-over-year. The Velera Payments Index found that growth in BNPL payments for the top BNPL merchants like Affirm, Klarna and Sezzle increased 24% for last year’s holiday season (October to December), compared to 2022. Klarna and Afterpay had the highest growth in BNPL payments for the cumulative holiday season, up 27% and 26%, respectively. When looking back at 2023 as a whole, Adobe Analytics reported BNPL drove $75 billion in online spending – $9.4 billion more than 2022.
BNPL’s popularity is likely to increase, especially with the 2024 holiday shopping season around the corner. Credit unions must keep up with the interest and demand of consumers for BNPL offerings or they will risk losing to competitors.
New Rule Introduced by the CFPB
“When consumers check out and choose buy now, pay later, they don’t know if they will get a refund if they return their product or whether the lender will help them if they didn’t get what was promised,” said CFPB Director Rohit Chopra. “Regardless of whether a shopper swipes a credit card or uses buy now, pay later, they are entitled to important consumer protections under longstanding laws and regulations already on the books.” The new rule is schedule to take affect within 60 days of the interpretative ruling, he added.
Bennett pointed out this news is positive for consumers who participate in point-of-sale BNPL installment payment plans, because they will finally be offered the same protections as those who participate in post-purchase BNPL solutions.
“If credit unions choose to offer post-purchase BNPL offerings, they already have several advantages over fintech BNPL merchants because members’ cards are already on an approved line of credit and comply with regulations through the underwriting process,” said Bennett. In addition, she noted that if a member participates in a post-purchase BNPL installment payment plan, their credit union has insight into their debt-to-income ratio, making additional lending decisions easier.
Key Takeaways
Bennett offered some other points:
“It is likely that many of your members are already using a BNPL offering.” This is especially true among younger generations: More than half of Gen Z (59%) respondents in Velera’s 2023 Eye on Payments study reported using BNPL programs, and younger millennials show the greatest likelihood of using their financial institution’s BNPL program (61%), an increase of 74% from 2021 (35%).
Backed by the “people helping people” philosophy, credit unions should continue providing educational resources about BNPL’s risks and benefits to help prevent members – whether young or old – from overextending themselves and getting into debt they cannot repay, especially as delinquencies are on the rise. A 2023 study from the CFPB found consumers who use a BNPL offering are twice as likely to be delinquent on another credit product.
Credit unions must make it clear to members that BNPL should be used as a budgeting tool to provide greater flexibility and choice when it comes to payments, not as an opportunity to live beyond their means.
Consider partnering with a fintech credit union service organization , like the St. Petersburg, Fla.-based Velera – formerly PSCU/Co-op Solutions – the nation’s premier payments CUSO– to offer a post-purchase BNPL solution for your members. Not only will this keep your credit union competitive with fintech BNPL merchants, it will even give your credit union a leg up on the competition, as post-purchase BNPL solutions already comply with the CFPB’s new rule.