The U.S. Consumer Financial Protection Bureau (CFPB) plans to start regulating buy-now-pay-later (BNPL) companies like Klarna and Affirm Holdings over concerns that their fast-growing finance products are hurting consumers, the agency said Thursday.
The watchdog, which does not currently oversee BNPL companies or products, will issue guidelines or a rule to align industry standards with those of credit card companies, he said. The agency also said it would implement appropriate surveillance reviews.
The development will be a blow to the sector, which is already under pressure due to rising financing costs and falling US consumer spending during soaring inflation.
It also marks a major offensive for CFPB director Rohit Chopra, who has pledged to watch tech-focused companies as they increasingly encroach on the traditional financial sector.
“In the United States, we’ve typically had a separation between banking and commerce, but as big tech-like business practices are adopted in payments and financial services, that separation may disappear,” he said. he told reporters.
BNPL services, which allow consumers to split purchase payments into installments, have exploded in popularity as Americans have turned 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 issued a total of 180 million loans in 2021, for a total of $24.2 billion, an annual increase of more than 200% compared to 2019.
The CFPB in its report, however, said it was concerned their products posed risks to consumers, pointing to a lack of standardized disclosures across the five companies surveyed and the potential for consumers to become overstretched.
In particular, the CFPB said that because BNPL’s providers do not provide data to credit reporting agencies, lenders may have an incomplete picture of a borrower’s liabilities, including BNPL’s loans to corporations. competitors.
The agency also highlighted the collection of customer data as a consumer risk and said it would begin to identify data monitoring practices that BNPL firms should avoid.
In a statement, a spokesperson for Affirm said its top priority was “to empower consumers by providing a safe, honest and responsible way to pay over time, with no late 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 report acknowledged that BNPL imposes significantly lower costs to consumers compared to traditional credit products.
A Klarna spokesperson said the company is “committed to financial well-being and consumer protection through industry innovation and proportionate regulation.”
The other BNPL suppliers included in the CFPB’s December survey did not immediately respond to requests for comment.
The CFPB was created following the 2008 financial crisis to crack down on predatory lenders, such as mortgage companies and payday lenders.
Although the agency does not traditionally oversee BNPL companies, Chopra told Reuters in July that he believed he had the power to regulate the companies’ activities when they were similar to those of traditional financial services firms.
However, BNPL companies are likely to fight this claim.
Share prices of “buy now, pay later” public companies have been under pressure this year, with Affirm down more than 75% and Zip down 79%. Klarna’s valuation fell around 85% in July.