Emerging Buy Now Pay Later (BNPL) market, which is becoming widely adopted, is about to take a hit. The Consumer Financial Protection Bureau (CFPB) said Thursday it is opening an inquiry into its popular programs.
The financial watchdog said it is particularly concerned about how BNPL impacts consumer debt accumulation, as well as what consumer protection laws apply and how the payment providers harvest data.
“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.
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“We have ordered Affirm, Afterpay, Klarna, PayPal and Zip to submit information so that we can report to the public about industry practices and risks.” The findings from this inquiry will be published later, the CFPB said.
The move comes a day after six Democratic US senators on the Committee on Banking, Housing, and Urban Affairs, including Elizabeth Warren, wrote a letter to the CFPB, urging it to look into potentially abusive practices in the industry.
“While the emergence of BNPL as affordable small-dollar credit has potentially provided an alternative to more costly forms of credit, these products also have the potential to cause consumer harm,” the senators wrote.
“Nonbank BNPL providers currently operate without meaningful oversight. They are not generally subject to federal supervision that can spot unfair, deceptive, or abusive practices or other violations of federal consumer protection laws,” the senators added, noting that “consumers may be unaware of these regulatory gaps and may be erroneously led to believe that credit obtained from a BNPL provider comes with protections that are similar to those for credit cards.”
BNPL programs came to life following the outbreak of COVID-19 and have been spurred by a surge in online shopping, largely created by the shift to digital life.
BNPL firms have seen record growth buoyed by the trend. Affirm shares have nearly doubled from their initial public offering price. The company announced a deal with Amazon in August. And Klarna has become one of the world’s most valuable privately held startups with a recent valuation of $45.7 billion.
However, the watchdog is worried that installment buying could encourage consumers to spend more than they can afford and juggling multiple payment plans can be harder to keep track of.
This year’s Black Friday and Cyber Monday shopping weekend “saw massive growth in BNPL,” the CFPB said.
Following the announcement, Affirm’s shares closed down 11% on Thursday. Australian companies Afterpay, Zip and Sezzle dropped 8%, 6% and 10% on Friday, respectively.
Affirm, Afterpay, Klarna, PayPal and Zip have until March 1, 2022, to gather detailed information about consumers’ shopping behavior, fees, loan performance, users’ demographics, data collection and other elements of their business models, according to the CFPB edict.
This is coming at a time when the U.K. government is also planning to introduce BNPL regulations. Part of the regulator’s aim is to put the companies under the auspices of the Financial Conduct Authority, which regulates financial services firms. The legislative research, which is expected to end Jan. 6, is being handled by the Britain Treasury Department with the help of BNPL companies.
Some of the companies who responded to the CFPB’s investigation said they welcome the move.
A spokesperson for Klarna told CNN Business that “we believe proportionate regulation is a good thing and set the standard by providing consumers with an interest free, fair and sustainable alternative to credit cards.”
“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 Klarna spokesperson added.
Zip said in a statement Thursday night that it “has always believed in transparency and we welcome the opportunity to continue sharing insights with the CFPB’s research and markets division. We have a shared mission to prioritize consumer financial wellbeing and as such we applaud the CFPB’s dedication to consumer protection.”
It added that the company “already abides by a number of federal and state regulations and we will continue to prioritize regulatory compliance as we create consumer-friendly products and services.”