US watchdog plans to regulate 'buy now, pay later' companies

WASHINGTON - The US Consumer Financial Protection Bureau (CFPB) plans to start regulating "buy now, pay later" (BNPL) companies like Klarna and Affirm Holdings due to worries that their fast-growing financing products are harming consumers, the agency said on Thursday.

The watchdog will issue guidance or a rule to align sector standards with those of credit card companies, it said. The agency also said it would implement appropriate supervisory examinations.

The development will be a blow for the sector, which is already under pressure due to rising funding costs and lower American consumer spending during soaring inflation. It also marks a major offensive for CFPB director Rohit Chopra, who has pledged to scrutinise tech-driven firms as they encroach on the traditional financial sector.

"In the United States, we have generally had a separation between banking and commerce, but as big tech-style business practices are adopted in the payments and financial services arena, that separation can go out the door," he told reporters.

BNPL services, which allow consumers to split purchase payments into instalments, exploded in popularity as Americans turned to online shopping during the coronavirus pandemic. Providers charge online retailers a fee for each transaction.

Following an inquiry last year, the CFPB found that BNPL providers Affirm Holdings, Block's Afterpay, Klarna, PayPal and Australia's Zip Co originated a combined 180 million loans in 2021, totalling US$24.2 billion (S$34 billion), a more than 200 per cent annual increase from 2019.

The CFPB in its report, however, said it was concerned that their products could pose risks to consumers, highlighting a lack of standardised disclosures across the five companies surveyed and the potential for consumers to become overextended.

In particular, it said that because BNPL providers do not give data to credit reporting agencies, lenders might have an incomplete picture of a borrower's liabilities, including BNPL loans at rival companies.

The agency also pointed to customer data collection as a consumer risk, and said it would start identifying data surveillance practices that BNPL companies should avoid.

In a statement, a spokesman for Affirm said its top priority is "empowering consumers by providing a safe, honest and responsible way to pay over time with no late or hidden fees".

"Today represents a big step forward for consumers and honest finance, and we are encouraged by the CFPB's conclusions," the spokesman said, noting that the report acknowledged that BNPL imposes significantly lower costs on consumers, compared with traditional credit products.

A spokesman for Klarna said the company "is committed to financial well-being and protecting consumers through industry innovation and proportionate regulation". The other BNPL providers included in the inquiry did not immediately respond to requests for comment.

Share prices of public BNPL companies have been under pressure this year, with Affirm down more than 75 per cent and Zip down 79 per cent. Klarna's valuation plunged around 85 per cent in July.

REUTERS