The US consumer watchdog on Thursday asked five “buy now, pay later” companies to hand over information on their business practices, in the boldest regulatory move yet against the fast-growing sector.
The US Consumer Financial Protection Bureau issued orders to Afterpay, Affirm, Klarna, PayPal and Zip seeking data on transaction trends, fees, underwriting policies and credit reporting, according to a sample order posted online.
The companies must hand over the information by March 1 and the agency plans to issue a public report on its findings.
“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,” said CFPB director Rohit Chopra.
The CFPB said it was mainly concerned about consumers accumulating debt owing to the ease of accessing BNPL loans, companies benefiting from regulatory arbitrage and lenders “harvesting” consumer data to their advantage.
The regulator’s move came a day after a group of Democratic senators on the banking committee sent a letter to the CFPB asking it to “take action” against BNPL products.
BNPL surged in popularity during the coronavirus pandemic by offering customers the option of paying for online shopping in instalments. This has helped fintechs such as Afterpay and Klarna report triple-digit per cent increases in balance sheet assets while many traditional lenders have struggled to grow their loan books.
However, shares of BNPL providers have plunged in recent weeks as regulators around the world have begun signalling concern about the sector. Affirm shares have fallen 36 per cent over the past month, while those of PayPal dropped 12 per cent.
Some executives in the industry said they welcomed more regulatory intervention. Affirm chief executive Max Levchin told the Financial Times last month that more standardisation and disclosures would benefit consumers. A spokesperson for the company echoed his sentiments in a statement after the CFPB order.
A spokesperson for Klarna also said “proportionate regulation” was a good thing for the industry.
“Through this process, we believe those benefits will be made abundantly clear and will continue our work with regulators to inform them about how our products are structured, used, and benefit both consumers and retailers,” the company said in a statement.
Zip said it was “keen to co-operate with the CFPB and explain what we do, address any concerns and crucially and how we treat consumers responsibly”.
Representatives for PayPal and Afterpay did not respond to requests for comment.
Any regulatory actions by the CFPB will probably not be announced until late next year giving the timing of the order, Barclays analysts wrote in a note.
The CFPB is co-operating with the UK’s Financial Conduct Authority as well as agencies in Australia, Sweden and Germany as a number of jurisdictions have raised concerns about ballooning BNPL activity.
The UK’s financial regulator this year said “buy now, pay later” credit deals offered by fintechs including Klarna and PayPal must be covered by its rules “as a matter of urgency” because of a “significant potential for consumer harm”.
