US consumer watchdog plans to regulate ‘buy now, pay later’ companies According to Reuters

© Reuters. FILE PHOTO: Signage is seen at the Consumer Financial Protection Bureau (CFPB) headquarters in Washington, DC, U.S., August 29, 2020. REUTERS/Andrew Kelly

By Hannah Lang

(Reuters) – The US Consumer Financial Protection Bureau (CFPB) plans to start regulating “buy now, pay later” (BNPL) companies like Klarna and Affirm Holdings due to concerns over financial products. Their fast-growing products are harming consumers, the agency said on Thursday.

The watchdog, which does not currently oversee BNPL companies or products, will issue guidelines or rules to align industry standards with those of credit card companies, it said. The agency also said it would carry out the appropriate surveillance checks.

The development would be a blow to a sector already under pressure from rising funding costs and falling American consumer spending amid high inflation.

It also marks a major attack on CFPB chief Rohit Chopra, who has pledged to scrutinize tech-driven companies as they increasingly foray into traditional finance.

He told reporters: “In the US, we usually have a separation between banking and commerce, but when big tech-style business methods are adopted in the payments and financial services sectors, it is not always the case. primary, the separation can be eliminated.


BNPL services, which allow consumers to split payments for purchases into installments, have exploded in popularity as Americans turn to online shopping during the coronavirus pandemic. Vendors charge online retailers for each transaction.

Following an investigation last year, the CFPB found that BNPL providers Affirm Holdings, Block’s Afterpay, Klarna, PayPal (NASDAQ:) and Australian Zip Co generated 180 million aggregated loans in 2021, total value of USD 24.2 billion, an increase of more than 200% year-on-year compared to 2019.

However, the CFPB in its report said it was concerned its products could pose a risk to consumers, highlighting the lack of standard disclosures across the five companies surveyed and the possibility of consumers becoming overly attentive.

Specifically, the CFPB said, because BNPL providers do not provide data to credit reporting agencies, lenders may have an incomplete picture of a borrower’s debts, including BNPL loans at rival companies.

The agency also singled out the collection of customer data as a risk to consumers and said it would begin identifying data monitoring methods that BNPL companies should avoid.

In a statement, an Affirm spokesperson said its top priority is to “empower consumers by providing a safe, honest and responsible payment method over time without the late or hidden fees”.

“Today represents a huge step forward for consumers and financial integrity, and we are encouraged by the CFPB’s conclusions following their review,” the spokesperson said. that the CFPB report acknowledges that BNPL imposes significantly lower costs on consumers than traditional credit products.

A Klarna spokesperson said the company is “committed to financial security and consumer protection through industry innovation and commensurate regulation.”

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

“We look forward to continuing to work with regulators like the CFPB to enhance positive consumer outcomes,” she said.

The CFPB was established after the 2008 financial crisis to crack down on loan sharks, such as mortgage and short-term lenders.

While the agency has traditionally not overseen BNPL companies, Chopra told Reuters in July that he believes it has the right to regulate companies’ operations when they are similar to those of translation firms. traditional finance.

However, BNPL companies are likely to resist that assertion.

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

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