US consumer watchdog plans to regulate ‘buy now, pay later’ businesses

US consumer watchdog plans to regulate ‘buy now, pay later’ businesses

by Hannah Lang

(Reuters) – The US Consumer Financial Protection Bureau (CFPB) plans to begin regulating “buy now, pay later” (BNPL) companies like Klarna and Affirm Holdings over concerns that their fast-growing financing products are hurting consumers, the agency said Thursday.

The agency, which does not currently oversee BNPL companies or products, said it would issue guidance or a rule to align industry standards with those of credit card companies. The agency also said it would carry out appropriate supervisory checks.

The development would be a blow to the sector, which is already under pressure due to rising financing costs and lower US consumer spending while inflation is rising.

It also represents a major attack on CFPB director Rohit Chopra, who has vowed to screen technology-driven companies as they increasingly encroach on the traditional financial sector.

“In the US, we’ve generally had a separation between banking and commerce, but with the adoption of big tech-style business practices in payments and financial services, that separation could go out the door,” he told reporters.

Pandemic spread Buy now, pay later for businesses

BNPL services, which allow consumers to split purchase payments into installments, have mushroomed as Americans switch to online shopping during the coronavirus pandemic. Service providers charge online retailers a fee per transaction.

Following an inquiry last year, the CFPB found that BNPL’s Affirm Holdings, Block’s Afterpay, Klarna, PayPal (NASDAQ 🙂 and Australia’s Zip Co providers created 180 million loans in 2021, totaling $24.2 billion, a year-on-year increase of more than 200% from 2019.

However, the CFPB said in its report that it is concerned that their products may pose risks to consumers, highlighting the lack of standardized disclosures across the five companies surveyed and the potential for consumers to be overly overpowered.

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In particular, the CFPB said that since BNPL providers do not provide data to credit reporting agencies, lenders may have an incomplete picture of borrower obligations, including BNPL loans at competing firms.

The agency also noted that collecting customer data is a consumer risk, and said it will begin to identify data monitoring practices that BNPL companies should avoid.

In a statement, a spokesperson for Affirm said its top priority is to “empower consumers by providing a secure, honest and responsible way to pay over time without any late or hidden fees.”

“Today represents a major step forward for consumers and honest financing, and we are encouraged by the conclusions of the CFPB after their review,” the spokesperson said, noting that the CFPB report acknowledged that BNPL imposes significantly lower costs on consumers than traditional credit products.

A Klarna spokesperson said the company is “committed to financial well-being and protecting consumers through industry innovation and proportionate regulation.”

Benny Lee, CEO of the Financial Technology Association, a trade group representing Afterpay, Klarna, PayPal and Zip, said in a statement that the report made clear BNPL is a competitive alternative to high-interest credit products.

“We look forward to continuing to work with regulators such as CFPB to promote positive outcomes for consumers,” she said.

The CFPB was created in the wake of the 2008 financial crisis to root out predatory lenders, such as mortgage companies and payday lenders.

While the agency has not traditionally supervised BNPL firms, Chopra told Reuters in July that he believes it has the ability to regulate companies’ activities when they are similar to those of traditional financial services firms.

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BNPL companies are likely to fight this assertion.

Share prices of “buy now, pay later” public companies have come under pressure this year, with Affirm down more than 75% and Zip down 79%. Klarna is down about 85% in value in July.

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