Global: US financial regulator scrutinising Afterpay and Zip as part of an inquiry into buy now, pay later companies

Australian fintech companies Afterpay and Zip are among several buy now pay later (BNPL) firms that will be forced by the US financial regulator to hand over information, in the strongest regulatory move yet in the fast growing sector.

The US Consumer Financial Protection Bureau (CFPB) have asked five buy now, pay later companies, including Afterpay and Zip, US businesses Affirm and PayPal and Sweden’s Klarna, to provide greater transparency around their credit practices.

It is seeking data on transaction trends, fees underwriting policies and credit reporting, according to a sample order posted online.

The announcement came a day after a group of Democratic senators on the banking committee sent a letter to the CFPB asking it to “take action” against BNPL products.

The move by the regulator follows growing scrutiny globally around the threat of rising indebtedness by payment services users, along with a lack of transparency around their practices.

As BNPL services do not currently come under the Payment System Regulation Act as designated payment systems, the government said it would use findings from Treasury’s Payments System Review to develop more targeted rules to ensure more oversight around fees and to promote competition.

In its statement the CFPB said companies must hand over the information by March 1 and that the agency plans to issue a public report on its findings.

Rohit Chopra, director of the CFPB, said the agency’s core concerns centred on growing evidence of rising debt from BNPL customers.

“Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too,” Chopra said.

“We have ordered Affirm, Afterpay, Klarna, PayPal, and Zip to submit information so that we can report to the public about industry practices and risks,” he said.

BNPL’s use spiked during the pandemic and throughout the US holiday shopping season, it said.

“More and more Americans are using it, and the most recent Black Friday and Cyber Monday shopping weekend saw massive growth in BNPL.”

2021 saw a similar explosion in the use of BNPL services in Australia, though the sector is still dwarfed by traditional credit services.

Approximately 14% of Australian adults had made a purchase using a BNPL service in the past four weeks as of June this year — up from 11% during the same period in 2020. An estimated $10 billion a year flows through the local platforms.

The inquiry also said it would work with international partners in Australia, Sweden, Germany and the UK’s Financial Conduct Authority.

“The Bureau will also be coordinating with the rest of the Federal Reserve System, as well as its state partners,” the CFPB said.

Regulators globally have begun to take action around the BNPL sector.

The UK’s financial regulator earlier this year said “buy now, pay later” credit deals offered by fintechs including Klarna and PayPal must be covered by its rules “as a matter of urgency”, because of a “significant potential for consumer harm”.

Earlier this month Financial Counselling Australia (FCA) called for a review of credit law as it pertains to BNPL companies following the release of its own report that found many users were “overcommitted” to BNPL products.

The number of clients presenting with BNPL debt has exploded over the last year, the organisation said, with 61% of its counsellors reporting clients with BNPL debt are struggling to pay for other living expenses, including bills and rent.

Similar research conducted in 2020 by the Australian Securities and Investments Commission (ASIC) found around one in five BNPL users chose to repay their BNPL balances before directly purchasing essentials like food.

ASX-listed Afterpay, which is close to finalising a $39bn merger with US-based Block, led by Twitter co-founder Jack Dorsey, last traded at $89.50.