Washington, D.C. is ratcheting up the pressure around the payments craze that is buy now, pay later.
The Consumer Financial Protection Bureau has opened up an inquiry into the model more commonly known as BNPL and is now asking five of the biggest providers in the space—Affirm, Afterpay, Klarna, PayPal, and Zip—for information about the risks and benefits of their offerings.
In a statement announcing the probe, the CFPB named several concerns about BNPL offerings, including whether the ease of them is allowing consumers to pile on more debt than they can handle, if BNPL lenders are appropriately considering consumer protection laws in creating and operating their products, and how they are handling, managing, and using consumer data.
“Buy now, pay later is the new verison of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too,” CFPB Director Rohit Chopra said.
For the past two years, over the course of the COVID-19 pandemic, BNPL has evolved from a niche offering into a captivating force in payments. The model is relatively straightforward: With BNPL, customers can buy both everyday items like an item of clothing as well as big-ticket ones like a TV and carve up the payments into several interest-free chunks. It’s not necessarily a new idea. Consumers have been able to effectively do the same thing through credit cards and layaway for decades, but BNPL providers are quick to point out that their offerings are interest free—putting them in stark contrast to credit cards specifically.
All of that has led to some staggeringly optimistic outlooks about the market’s growth.
In 2020, the share of e-commerce that was done in North America via BNPL stood at 1.6%, according to a report from FIS-owned Worldpay. That is expected to grow to 4.5% by 2024. Globally, BNPL is far more popular than it is in the U.S., as it accounted for about 2.1% of all e-commerce transactions in 2020, according to WorldPay. However that too is expected to jump by 2024 to 4.2%.
Companies of all sizes have as a result piled into to build out BNPL offerings or carry one themselves. For instance, Jack Dorsey’s payments company Block, formerly known as Square, agreed earlier this year to pay $29 billion to acquire Afterpay. Goldman Sachs and Apple have been said to be working together on a BNPL offering. And Affirm, the financial technology company founded by former PayPal executive Max Levchin, has inked a series of deals throughout 2021—most notably with Amazon—to bring its BNPL capabilities to the masses.
At the same time, regulators in Washington, D.C. have grown concerned about the potential risks that lie in the structure. Just a day before the CFPB launched its inquiry, a group of high-profile Democratic Senators, including Sens. Sherrod Brown of Ohio, Elizabeth Warren of Massachusetts, and Chris Van Hollen of Maryland, posed similar concerns in a letter to Chopra (a long-time aide to Warren).
“While the emergence of BNPL as affordable small-dollar credit has potentially provided an alternative to more costly forms of credit, these products also have the potential to cause consumer harm,” the Senators wrote.
Shares in Affirm, one of the two U.S. publicly traded BNPL companies mentioned as part of the CFPB probe, sank during trading Thursday. Affirm ended the day down 10.6% at $99.24. PayPal, the other, dropped 1% to $188.75. And Block, the Dorsey-led company that has agreed to acquire Afterpay, fell 4.6% to $165.88.
In separate statements shared with Fortune regarding the CFPB’s inquiry, spokespeople for Affirm, Klarna, PayPal, Afterpay, and Zip all voiced support for working with the regulator about informing it of their products and how they’re used.
Klarna’s spokesperson added in the emailed statement that the company sees “proportionate regulation” as a “good thing” that would “set the standard by providing consumers with an interest free, fair and sustainable alternative to credit cards.” A spokesperson for Max Levchin’s Affirm said the company supports “regulatory efforts that benefit consumers and promote transparency within our industry.” Afterpay’s spokesperson said it “welcomes efforts to ensure that there are appropriate regulatory protections for consumers in the diverse BNPL industry, and that providers are meeting high standards and delivering positive consumer outcomes while protecting their data.” And Zip said in an emailed statement that it “will continue to prioritize regulatory compliance as we create consumer-friendly products and services.”
