The buy-now pay-later craze is rapidly gaining steam in the U.S., prompting regulators to take a look at the hot payment option that lets consumers split purchases into installments.
The Consumer Financial Protection Bureau announced Thursday that it has launched an inquiry into BNPL credit. The CFPB asked Affirm Holdings Inc. AFRM,
Shares of Affirm are sliding more than 11% in Thursday afternoon trading, while U.S.-listed over-the-counter shares of Afterpay, an Australian company in the process of being acquired by Square-parent Block Inc. SQ,
The buy now, pay later wave: Afterpay, Klarna, Affirm and rivals hope to take U.S. by storm
The CFPB is interested in exploring various issues related to BNPL, including the ability for consumers to accumulate debt and the data-harvesting practices of BNPL operators. “The Bureau would like to better understand practices around data collection, behavioral targeting, data monetization and the risks they may create for consumers,” according to the release.
An Affirm spokesperson said that the company would continue to work with regulators: “We welcome the CFPB’s review and support regulatory efforts that benefit consumers and promote transparency within our industry. For nearly a decade, Affirm has been advancing its mission to deliver honest financial products that improve lives, and we have never charged a late or hidden fee, ever.”
Affirm Chief Executive Max Levchin said at the company’s September investor event that he was “fairly pro-regulation when it comes to these new financial products,” calling attention from regulators “positive so long as it is rooted in understanding of the product” and its intent.
A spokeswoman for Afterpay said that the company “welcomes efforts to ensure that there are appropriate regulatory protections for consumers in the diverse BNPL industry, and that providers are meeting high standards and delivering positive consumer outcomes while protecting their data.” She also called Afterpay’s offerings more transparent and affordable than traditional credit.
A PayPal spokesperson said that the digital payments giant is reviewing the CPFB letter and will work with the agency to provide information. “Our customers trust us to be transparent and we take this responsibility very seriously,” the spokesperson said.
Representatives from Block, Klarna, and Zip didn’t immediately respond to MarketWatch’s request for comment.
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Barclays analyst Ramsey El-Assal wrote that the CFPB inquiry represents “primarily headline risk, for now,” noting that the companies are due to submit their responses by March 1, which suggests that if any regulatory action follows, it wouldn’t take place until later in 2022.
“At a high level, we think BNPL is generally superior to revolving credit,” El-Assal wrote. Still, he acknowledged that “the industry could face headwinds if providers are required to implement more stringent underwriting standards (thereby rejecting more potential borrowers, though this would be antithetical to the goal of expanding credit access), and report all loans to the credit bureaus, which could result in borrowers not being able to take on multiple loans at once.”
