Does the use of Buy Now, Pay Later (BNPL) increase consumer debt and encourage overextension?
The CFPB thinks so. A new report from the CFPB on BNPL, markets, and consumers highlights the growth of BNPL and the role it plays in consumer debt.
The report also details the CFPB’s three-fold plan to regulate the once-niche lending practice:
- Outline how BNPL lenders must adhere to the baseline protections already established for credit card companies;
- Identify the data surveillance practices that BNPL lenders should avoid;
- Develop accurate credit reporting practices for BNPL loans
The report is focused on creating a regulatory roadmap for BNPL lending generally, but there are several major takeaways for collections & recovery professionals across consumer lending.
1. The CFPB Is Still Focused on Credit Reporting
The CFPB’s messaging in their announcement of the report is consistent with other recent communications from the Bureau: their focus is on credit reporting and they plan to use the FCRA to advance their agenda as opposed to traditional rule-making.
As it relates to their BNPL study, the CFPB directly connects the overextension of consumers to the current credit reporting practices of BNPL lenders, saying “borrowers can easily end up taking out several loans within a short time frame at multiple lenders…because BNPL lenders do not currently furnish data to the major credit bureaus.”
The CFPB wants BNPL lenders to report to the credit bureaus, which could lead to a dip in originations because of a more accurate credit picture. When originations are down, a robust collections & recovery strategy takes center stage.
2. As Consumers Increasingly Use BNPL to Finance Necessary Purchases, Collections Strategy Across Lending May Need to Shift
The increased costs of necessities like groceries and energy is forcing consumers to purchase those items using a BNPL loan, where in the past, BNPL was used primarily for luxury purchases. Inflation drove 60% of users to finance a non-luxury purchase through BNPL.
It’s more difficult to collect when the debt was accrued as a result of necessary purchases rather than luxury ones. Consumers are less likely to have the cash to pay off debt if they are financing items like groceries and gas. A consumer-friendly, compliance-focused collections strategy may be critical to lenders who want to recoup debt from consumers who may be overextended.
Three Consumer-Friendly, Compliance Focused Strategies to Consider
So, what should collections & recovery departments do now to prepare for higher, more difficult to collect delinquencies?
- Focus on optimizing an outbound contact strategy, especially if you only have a limited amount of contact information for borrowers. Contact precision via telephone, email, or SMS will be key to recovering outstanding debt.
- Build a robust vendor management program. If there is a major influx of delinquencies, it will be nearly impossible for all but the major lenders to use an exclusively first-party strategy. Vendor management will be critical to a successful collections strategy. This includes preparing for debt sale, too.
- Make consumer experience a priority. When consumers are overextended, it’s much more likely they will have complaints, and more complaints means more risk. Create a plan to make consumer experience a top priority in your collections & recovery strategy.
Bonus read: A Guide to Buy Now, Pay Later and Digital Debt Collections
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