bnpl companies

The BNPL (buy-now-pay-later) industry has boomed over the last couple of years. However, delinquencies are also rising and the US Consumer Financial Protection Bureau (CFPB) is now looking to regulate the industry on the lines of credit cards.

CFPB Director Rohit Chopra has argued that BNPL companies should be monitored like credit card companies. He said that these companies are “harvesting and leveraging data in ways we don’t see with other companies.”

The CFPB started investigating the BNPL industry in 2021 only and sought data from five companies namely, Affirm, Afterpay, Klarna, PayPal, and Zip. In its report, the CFPB pointed to the explosive growth in the industry. It found that in 2022, these five BNPL companies originated 180 million loans with a total value of $24 billion. The volume was up more than tenfold from 2019.

It added that while BNPL was initially focused on beauty and apparel, it has now expanded to other industries including groceries and gas. Notably, last year, Affirm partnered with Amazon to offer its solutions on the e-commerce platform.

Why is CFPB Worried about BNPL Industry? Here’s the Scoop

In its report, CFPB pointed out that in 2022, BNPL companies approved 73% of applicants which was 4 percentage points higher than what they did in 2019. Also, in 2021, 10.5% of unique users were charged at least one late fee, while the corresponding figure was 7.8% in 2020.

The report also found that an increasing number of BNPL borrowers returned the goods in 2021 while the profit margins of lending companies declined.

The delinquency rates are also rising and in 2021, the industry’s charge-off rate was 2.39% as compared to 1.83% in 2020. During its most recent earnings call, Affirm also talked about a slight uptick in delinquencies but maintained that it is not compromising on credit standards.

Analysts expect delinquencies in the BNPL industry to rise further amid the macroeconomic turmoil. The US economy contracted in the first half of 2022. Economists expect the Fed to raise rates by at least 75 basis points this month to tame inflation.

Growth stocks like BNPL companies are among the worst hit by rising inflation and higher interest rates. However, there are some investments that can outperform during inflation.

CFPB Sees Buy-Now-Pay-Later as a Systemic Risk

Going by the CFPB’s release, it sees buy-now-pay-later as a systemic risk. The report said, “Buy Now, Pay Later is engineered to encourage consumers to purchase more and borrow more. As a result, borrowers can easily end up taking out several loans within a short time frame at multiple lenders or Buy Now, Pay Later debts may have effects on other debts.”

It also said that since BNPL companies don’t report their data to credit bureaus, other lenders don’t get the correct picture of a borrower’s liability while approving the loan. Additionally, CFPB is also worried about BNPL companies harvesting and monetizing user data.

The CFPB added, “It also may lead to a consolidation of market power in the hands of a few large tech platforms who own the largest volume of consumer data, and reduce long-term innovation, choice, and price competition.”

BNPL is Among the Most Exciting Fintech Themes

BNPL is among the most promising fintech themes and 2021 was a particularly good year for the industry. Affirm went public through an IPO last year and the stock saw good buying interest. Later in the year, Block, which was previously known as Square, also announced the acquisition of Afterpay.

Apple is also entering the industry. The company sees financial services and healthcare as two of the biggest growth drivers.

Meanwhile, the valuations of buy-now-pay-later companies have slumped over the last year. Affirm stock trades at a fraction of its all-time highs. Privately-held Klarna also took a big haircut to its valuation in the most recent funding round. We have a guide on how to invest in pre-IPO companies.

The increasing regulatory scrutiny could be a new headache for BNPL companies as the CFPB looks to regulate the industry like credit cards.

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