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  • Frank Tian

👛 CFPB Reports on BNPL

Updated: Sep 26, 2022

Here is a summary with some highlighted numbers.

🔲 The Data

In Dec 2021, CFPB asked for data from 5 major BNPL operators in the US: Affirm, Afterpay, Klarna, PayPal, and Zip.

Yesterday the agency released an 80+ page report based on the aggregated data. No consumer-level data was available.

🔲 The Stats

◾ BNPL customers are skewed to the young: 49% are age 33 and under.

◾ Apparel and beauty is the biggest category: 59% of the total $ spent.

◾ Majority payment is from the debit card: 89% vs 10% from a credit card.

◾ Habitual users: 15.5% carrying 5+ loans; 4.0% carrying 10+ loans.

◾ Pay Late: 10.5% of borrowers are charged with a 1+ late fee.

🔲 The Profit Model

Using 2021 numbers:

◾ BNPL earns 4.0%~ of total purchase as revenue.

  • Merchant discount: 2.49%

  • Interchange: 0.67%

  • Referral: 0.32%

  • Late fees: 0.28%

◾ BNPL incurs 3.0%~ of total purchase as cost.

  • Payment processing: 1.47%

  • Credit loss: 1.30%

  • Cost of funds: 0.16%

◾ BNPL earns a profit of 1.0%~ of total purchase.

🔲 The Challenges

Before the regulator is yet to step in:

◾ Competition leads to lower revenue

The low barrier of entry makes merchant discounts a race to the bottom. Then come the heavyweights such as MasterCard Installment/Apple Pay Later.

◾ Increase in cost of fund

The Fed hike the rate by 225 bps already in 2022 … it could go another 150 bps.

◾ Rise of credit loss

Consumer credit loss is gradually normalizing towards the pre-pandemic level: 3.79% in 2021 vs. 2.93% in 2020.

It will become worse if a recession materializes, even a mild one.

🔲 The Actions

The operators have adopted the following:

◾ Hike the late fee

◾ Tighten the underwriting

◾ Turn the app into the lead engine

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