According to reports, the US Consumer Financial Protection Bureau (CFPB) plans to regulate “buy now, pay later” companies. Reports claim that due to the rapid growth of financial products companies such as Klarna and Affirm Holdings, CFPB believes they can harm consumers. Thus, plans are underway to regulate these companies. The CFPB does not currently oversee buy now pay later companies or their products. However, the agency claims to have guidelines or regulations consistent with those of credit card companies. The CFPB also indicates that it will put in place appropriate control and inspection mechanisms.
This decision will be a blow for the entire industry. In fact, these companies have already been pressured by rising financing costs and declining consumer spending in the United States. The decline in consumer spending is obviously due to inflation. It also marks a major offensive by CFPB manager Rohit Chopra. He has previously pledged to watch tech-focused companies as they increasingly encroach on the traditional financial sector.
“Banking and commerce in the United States are often separated. But as payment services begin to adopt the big tech approach, this segregation could be broken down,” he said.
“Buy now, pay later” businesses are on fire
With the “buy now, pay later” service, consumers can pay in installments. The popularity of these services has grown as American consumers have made extensive use of e-commerce during the pandemic. Merchants pay fees to the provider each time a consumer completes a transaction through the “buy now, pay later” service.
A CFPB survey last year found that ‘buy now, pay later’ providers Affirm Holdings, Block’s Afterpay, Klarna, PayPal and Australia’s Zip provided 180 million consumer loans in 2021 for a total of $24.2 billion. But the CFPB says in the report that it is concerned these products pose risks to consumers. The bureau points to the lack of standardized information disclosure mechanisms among the five companies. It also highlights the potential for these companies to trick consumers into overspending.
Because “buy now, pay later” providers do not provide data to credit reporting agencies, lenders may not have a complete picture of borrowers’ debts. This includes consumer loans from other “buy now, pay later” companies, the CFPB said. The way buy-it-now and pay-later agencies collect consumer data also poses risks, the CFPB said. They will gradually identify data surveillance practices that these companies should avoid.
In a statement, a spokesperson for Affirm said the company’s priority is “to provide consumers with a safe, honest and responsible way to pay in installments without late or hidden fees.” “Today represents a huge step forward for consumers and integrity finance, and we are encouraged by the findings of the CFPB’s assessment,” the spokesperson said, noting that the CFPB report acknowledges that compared to traditional “buy now, pay later” credit products. significantly reduces costs for consumers.
The companies concerned claim its safe
A Klarma spokesperson said the company “will be committed to maintaining financial stability and protecting consumers through industry innovation and appropriate regulation.” A Zaip spokesperson said… “We are delighted that the CFPB has recognized the value of ‘buy now, pay later’ for consumers. This includes providing them with easy-to-use, low-cost lines of credit, especially in this tough economic environment. »
The Financial Technology Association is an industry group representing the interests of a number of “buy now, pay later” companies. Group chief executive Penny Lee said in a statement that the report identified “buy now, pay later” as a competitor to high-interest credit products.
“We look forward to continuing to work with regulators such as the CFPB to achieve beneficial results for consumers,” she said. The CFPB was created after the financial crisis of 2008. Its main mission is to crack down on predatory lenders such as mortgage companies and payday lenders. Although the agency has not previously overseen “buy now, pay later” companies, Chopra said in July that it has the authority to oversee these companies as they move closer to traditional financial services firms. .
However, “buy now, pay later” companies may disagree. Shares of “buy now, pay later” companies have come under selling pressure this year. Shares of Affirm have fallen more than 75% this year, and Zip has also reached 79%. Klarna’s valuation fell 85% in July.
Apple joins buy now, pay later service
American giant “buy now, pay later”, says Max Levchin, CEO of Affirm he’s not worried about Apple’s next buy now pay later service. This is because Affirm’s services are more extensive in the longer term.
“I don’t think there’s anything to worry about, there is plenty of room for growth on all sides,” Levchin said, saying buy-now-pay-later transactions account for less than 5% of U.S. transactions.
Affirm offers loans to customers for periods ranging from 6 weeks to 60 months, and Apple allows customers to make four payments over a 6-week period. Levchin thinks Apple services can boost the buy-now-pay-later market.
On Monday local time, Apple officially launched the Apple Pay Later service at WWDC. Unlike other similar platforms, Apple Pay Later is directly integrated with the iPhone Wallet app, which is pre-installed on the new iPhone. Swedish “buy now, pay later” service provider Klarna, a competitor of Affirm, recently announced 10% layoffs due to difficult circumstances. Levchin, who said he was still hiring, thinks Apple’s new service will challenge rivals who focus on short-term loans. Apple’s current Buy Now, Pay Later service targets short-term loans. However, the company is also developing monthly Apple Pay installments, which will directly compete with Affirm.