US consumer watchdog asks BNPL companies for data on services, shares tumble

• CFPB is concerned about the impact of BNPL in the accumulation of consumer debt

• The UK government is also planning to introduce regulations for the BNPL sector

U.S. consumer watchdog on Thursday asked five “buy-now, pay-later” companies to provide information on their financing business practices amid concerns that these services are putting consumers at risk.

The Consumer Financial Protection Bureau (CFPB) started an inquiry on PayPal Holdings Inc, Affirm Holdings Inc, Afterpay Ltd, Klarna, and Zip Co in the wake of a boom in Buy-Now, Pay-Later (BNPL) financing services, which allow consumers to split purchase payments into monthly installments without any interest — though some do charge hefty late payment fees.

“Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately, too,” CFPB Director Rohit Chopra said in a statement.

ALSO READ: “Buy now, pay later” may lead to high consumer debt, warn analysts

The CFPB said it is looking into “regulatory arbitrage and data harvesting” and the risks and benefits of the products.

Shares of Australia-listed Afterpay and Zip tanked sharply on Friday, dropping over 7.5% and 6%, respectively.

Nasdaq-listed Affirm tumbled nearly 7%, and PayPal fell more than 3.5% in the early trading in New York.

Uprise of BNPL

The agency said it is particularly worried about how BNPL impacts consumer debt accumulation, which is more concerning following the growth of online shopping during the coronavirus pandemic.

Investors flocked to BNPL stocks last year after the sector grew enormously due to the shift in consumer habits towards e-commerce and flexible loans, coupled with huge government stimulus packages.

Fintech giant PayPal launched its BNPL offering late last year and in September said it would acquire Japanese BNPL company Paidy for $2.7 billion.

Block, formerly known as Square, in August, announced a $29 billion deal to buy Afterpay.

In October, Stripe and Klarna, two of the world’s biggest private fintech companies, announced a partnership to provide the BNPL service.

However, market players have been alarmed at mounting losses from firms in the sector.

Zip’s pre-tax loss jumped to 724 million Australian dollars ($518 million) in 2021, compared to a loss of 20.6 million Australian dollars a year earlier.

ALSO READ: H&R Block sues Jack Dorsey’s Square over changing name to Block

Afterpay lost 194 million Australian dollars in its full-year results, compared to 26.8 million in 2020.

Regulation for the industry

After the inquiry announcement, Klarna said, “we believe proportionate regulation is a good thing,” and Affirm welcomed CFPB’s review and said it will “benefit consumers and promote transparency.”

ALSO READ: Stripe co-founder John Collison says the $95B fintech giant is not planning to go public

While Afterpay supported the efforts to ensure appropriate regulatory protections for consumers, PayPal said it was reviewing the CFPB inquiry and would comply. “Our customers trust us to be transparent, and we take this responsibility very seriously,” a spokesperson said.

The UK government is also planning to introduce regulations for the BNPL sector.

Britain’s Treasury Department is consulting with BNPL firms and other stakeholders to inform its plans to bring the industry under the supervision of the Financial Conduct Authority, which regulates financial services firms in the country.

Picture Credit: Oriente