The news: Buy now, pay later (BNPL) providers approved 79% of applications in 2022, a jump from 56% in 2019, per a CFPB report.

The number of originated loans totaled an estimated 277.3 million that year. We estimate 69.2 million US consumers used BNPL users in 2022, per our forecast.

Here’s how approval rates got so high:

• Providers offered more counteroffers. Instead of declining applications outright, they would condition approval on things like down payments above the typical 25%.
• Approving loans to consumers with subprime (between 580-619) and deep subprime (below 580) FICO scores also boosted approvals. Between 2021 and 2022, these groups accounted for more than 60% of all originated BNPL loans. Borrowers without a FICO score made up 4% of loans during this time period.
• And as the industry matured, a larger share of applications came from returning customers—letting providers use past repayment history to supplement their underwriting strategies.

Is this an issue? Despite approving risker consumers, defaults on BNPL loans remain limited.

• The average default rate on a BNPL loan was 1.9% between 2021 and 2022. Comparatively, the credit card default rate was 8.7%.
• Consumers with no FICO scores had a default rate of 4.1%, while 3.5% of deep subprime consumers defaulted.

The CFPB attributes the stark divide between BNPL and credit cards’ default rates to structural repayment differences. Most BNPL providers require automatic repayments. Consumers may also be paying down their BNPL obligations first because they’re smaller and more manageable.

Our take: There are worrying signs that BNPL users may be overextending themselves, leaving them unable to pay back other debt obligations.

• Consumers who have used at least one BNPL loan in a given month are also more likely to hold higher balances on other types of unsecured consumer credit, per the CFPB.
• They’re also using BNPL for everyday expenses, possibly signaling they don’t have the cash flow to get by.

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