BNPL services, which allow consumers to split purchase payments into installments, exploded in popularity as Americans turn to online shopping during the COVID-19 pandemic
BNPL services, which allow consumers to split purchase payments into installments, exploded in popularity as Americans turn to online shopping during the COVID-19 pandemic
The agency said Thursday that the US Consumer Financial Protection Bureau (CFPB) plans to begin regulating “buy-now, pay-later” (BNPL) companies such as Klarna and Affirm Holdings, as their fast-growing financial The products are harming the consumers.
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The watchdog, which does not currently oversee BNPL companies or products, will issue guidance or rules to align sector standards with those of credit card companies, it said. The agency also said that it would implement appropriate supervisory examinations.
The growth will come as a blow to the sector, which is already under pressure from rising funding costs and lower US consumer spending during a period of rising inflation.
It is also a big offensive sign for CFPB director Rohit Chopra, who has vowed to scrutinize tech-driven companies as they increasingly encroach on the traditional financial sector.
“In the US, we generally keep a separation between banking and commerce, but as the payments and financial services sectors adopt big tech-style business practices, the separation can go out the door,” he told reporters. Said to.
Pandemic popularizes ‘buy now, pay later’ companies
BNPL services to the consumers Split the purchase payment into installments, exploded in popularity as Americans turn to online shopping during the coronavirus pandemic. Providers charge online retailers a fee for each transaction.
Following an investigation last year, the CFPB found that BNPL providers Affirm Holdings, Block’s Afterpay, Klarna, PayPal and Australia’s Zip Co. originated 180 million loans in 2021, totaling $24.2 billion, an annual increase of more than 200% from 2019.
The CFPB in its report, however, said it was concerned that their products could pose a risk to consumers, highlighting the lack of standardized disclosure across the five companies in the survey and the potential for consumers to be more expanded.
Notably, the CFPB said because BNPL providers do not provide data to credit reporting agencies, lenders may have an incomplete picture of a borrower’s liabilities, including BNPL loans, on rival companies.
The agency also pointed to customer data collection as a consumer risk, and said it would begin identifying data monitoring practices that BNPL companies should avoid.
In a statement, a spokesperson for Affirm said that its top priority is to “empower consumers by providing them with a safe, honest and responsible way to make payments over time, without delay or hidden fees.”
“Today represents a major step forward for consumers and honest finance, and we are encouraged by the CFPB’s findings following their review,” the spokesperson said, noting that the CFPB’s report acknowledged that BNPL is not a traditional financial institution. It imposes a much lower cost on consumers than credit products.
A Klarna spokesperson said the company is “committed to the financial well-being and protection of consumers through industry innovation and proportional regulation.”
Other BNPL providers involved in the CFPB’s December investigation did not immediately respond to requests for comment.
The CFPB was created in the wake of the 2008 financial crisis to crack down on predatory lenders such as mortgage companies and payday lenders.
While the agency does not traditionally oversee BNPL companies, Chopra told Reuters in July that he believes they have the power to regulate the companies’ activities while being on par with traditional financial services firms.
However, BNPL companies may dispute this claim.
Share prices of public “buy now, pay later” companies have been under pressure this year, with Confirmation down more than 75% and Zip down 79%. Klarna’s valuation fell nearly 85% in July.