Shares of multiple “buy now, pay later” (BNPL) companies plunged after the Consumer Financial Protection Bureau investigated the sector. On Thursday, the CFPB announced that it was seeking information about the hazards and benefits of Affirm, Afterpay, Klarna, PayPal, and Zip’s services. Customers can pay for products over time, usually in monthly installments with no charge, but some BNPL programs charge significant late fees.
The CFPB is concerned about the possibility for customers to amass debts through BNPL plans swiftly and a lack of adequate regulatory warnings and data gathering. Following the disclosure, the stock prices of several BNPL companies dropped. For example, affirm, based in the United States, saw its stock fall 11% on Thursday, while Afterpay, Zip, and Sezzle, all based in Australia, saw their stock fall 8%, 6%, and 10%, respectively, on Friday. Last year, investors rushed to BNPL equities as the coronavirus outbreak accelerated the sector’s growth.
Consumer preferences for e-commerce, flexibility in financing, and significant government stimulus packages help companies like Klarna, Affirm, and Afterpay enormously. As a result, prominent software firms like PayPal and Block have invested in BNPL to turn a profit from the industry’s growth. Late this year, PayPal debuted its BNPL offering, while Block, once known as Square, recently stated the $29 billion acquisition of Afterpay.
In 2021, however, the tide had begun to turn. Afterpay’s stock has lost more than 30% since the beginning of the year, while Zip’s price has dropped 25%. Year to date, the value of Sezzle’s stock has more than halved. Affirm, which launched at the beginning of the year, is one of the few BNPL companies still profitable. Nevertheless, the growing losses in the sector have concerned market participants.
In 2021, Zip’s pre-tax loss grew to 724 million Australian dollars i.e. $518 million, rising from 20.6 million in the previous year. Afterpay lost 194 million Australian dollars for the full year, as opposed to 26.8 million in 2020. Meanwhile, analysts have emphasized that future restrictions could be a major roadblock for the business. Christopher Brendler, D.A. Davidson analyst, cautioned the CNBC on Friday that a regulatory response “may limit the expansion” of the BNPL industry.
The government of the U.K. intends to regulate BNPL. The Financial Conduct Authority, which supervises companies in the U.K., would be in charge of the new sector. The Treasury Department of the United Kingdom is talking with BNPL businesses and other stakeholders to inform its preparations. On January 6, 2022, the consultation process will close.