US Government Watchdog Launches Probe Into ‘Buy Now, Pay Later’ Companies, Stocks Crash

US Government Watchdog Launches Probe Into ‘Buy Now, Pay Later’ Companies, Stocks Crash

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US Government Watchdog Launches Probe Into 'Buy Now, Pay Later' Companies, Stocks Crash. Photo Credit: hapabapa /iStock

Buy now, pay later companies are hot right now, especially as people wrap up their Christmas shopping and try to stick to a budget. Companies such as Affirm, Afterpay, Klarna, PayPal and Zip allow consumers to purchase items and pay for them over a scheduled period. 

Unlike layaway plans, consumers get the goods right away when they buy now, pay later (BNPL). By contrast, layaway programs only let you get your items when you finish paying the balance due. Some of BNPL companies charge an interest fee; others don’t.

The Consumer Financial Protection Bureau (CFPB) has started a probe into the popular BNPL firms. When the investigation was announced, buy now, pay later stocks plummeted.

Affirm’s shares were down by 11 percent on Dec. 16, while Afterpay and Zip on Dec. 17 dropped 8 percent and 6 percent, respectively, CNBC reported. 

The government watchdog agency’s investigation into the sector is looking at the risks and benefits of their products.

The Financial Protection Bureau was specifically concerned about how consumers can accumulate debt using buy now, pay later services and how the BNPL companies may harvest data about their customers, CNN reported.

The announcement of the probe came a day after six Democratic senators on the Committee on Banking, Housing, and Urban Affairs, including Elizabeth Warren, wrote a letter to the CFPB, urging it to look into potentially abusive practices in the BNPL sector.

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“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.

“Nonbank BNPL providers currently operate without meaningful oversight. They are not generally subject to federal supervision that can spot unfair, deceptive, or abusive practices or other violations of federal consumer protection laws,” the senators added, noting that “consumers may be unaware of these regulatory gaps and maybe erroneously led to believe that credit obtained from a BNPL provider comes with protections that are similar to those for credit cards.”

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Many more companies are jumping into the BNPL arena as the industry grows.

PayPal, for example, launched its own BNPL payment option late in 2020, while Block (formerly known as Square) recently announced a $29 billion deal to buy Australian-based Afterpay, CNBC reported.